JPMorgan downgrades Centrica amid concern over UK supply market changes

JPMorgan Cazenove downgraded British Gas owner Centrica to 'underweight' from 'overweight' and slashed the price target to 180p from 265p, highlighting the "unsettling reality" of UK supply market changes.

The bank said that despite the strength of Centrica's UK supply operations, two issues have arisen recently which concern it.

Firstly, it sees significant downside from the price regulation of Centrica's Standard Variable Tariff customer base. Its initial view of the damage to earnings per share was negative, but manageable at -10% to -20. However, the bank's analysis of Ofgem’s regulated prepayment meter tariffs points to a deeper EPS erosion at up to -42%.

The bank said it has carried out a full review of Ofgem’s PPM tariff materials, which has alarming implications for Centrica's supply margins. "For instance, if regulated price caps were in place in 2016 we estimate that dual fuel bills would have been a full £100/customer lower on average for the Big 6."

Secondly, JPM pointed to evidence of a price war emerging, with incumbent generation owner Engie entering the residential supply market with heavily discounted residential tariffs. "Having lost customers in Q1 (at an annualised rate of 7.5%), Centrica has already been forced to respond with heavily discounted offers via its Sainsbury’s brand," it said.

JPM noted that Engie cut its UK dual fuel offering to less than £900 last month.

At 1040 BST, the shares were down 1.6% to 191.77p, with the stock ex-dividend on Thursday.