UBS upgrades Centrica, sees shares as 'cheap'

UBS has upgraded its rating for British Gas owner Centrica from 'neutral' to 'buy', saying that the stock carries too large a discount associated with its capital deployment plans.

UBS said in a research note that Centrica has around £1.5bn to £2.0bn in excess capital, in addition to around £0.5bn to £0.6bn per annum from 2026 for growth investments, bringing the total up to £3.5bn through to 2028.

However, at Tuesday's closing price of 131.15p, the bank estimates that the shares price in around a 50% value erosion from this uncommitted capital.

"Our view is that Centrica's stock carries a c50% discount on €3.5bn capital deployment to 2028E (options include new-build nuclear in a RAB structure) and lack of visibility on the trading businesses," UBS said. "We believe both concerns are more than reflected in the price and view the shares as cheap."

The bank has cut its earnings forecasts for the next four years by between 4% and 12% due to lower energy prices in upstream and the prediction that "switching in supply comes back".

However, due to higher cash generation in 2023 and lower decommissioning provisions, the target price on the shares has been lifted to 170p from 165p.

Centrica's stock trades at an enterprise value-to-EBITDA ratio of around 3.5 times, but warrants a multiple of closer to 5 times, UBS said.

The shares were up nearly 2% at 133.5p by 1108 BST.