UBS ups Centrica to 'buy' on improving outlook

UBS upgraded Centrica to ‘buy’ from ‘sell’ and lifted the price target to 255p from 185p saying the outlook for the stock has changed.

The bank noted Centrica shares are down around 50% from their 2013 peak of 402p, on the back of a downstream CMA inquiry and falling commodities.

However, both factors have now eased, UBS said. It argued that the balance sheet and ratings have been shored up by the capital raised in May and said that with reduced capex, it now forecasts free cash flow of around £1bn a year from 2016-18, making a dividend cut unlikely.

UBS said the Competition and Markets Authority proposals were less challenging than it had expected, with structural remedies such as a the break-up of British Gas or divestment of large slices of the customer base seemingly off the table.

“We note the impact of the remaining measures (prepay tariff cap; marketing database for sticky customers) could be offset by the end of Ofgem's four tariff limit, which opens the door to acquisition discounts and could help stabilise customer numbers.”

In addition, the bank highlighted the fact that commodities – which had weighed on the upstream division – are now recovering.

“Clean spark spreads are up by c40%; load factors for UK gas power stations are up strongly; and an extension of the UK capacity market arrangements is likely in our view. All these factors benefit Centrica's upstream division.”

At 1420 BST, Centrica shares were down 0.8% to 200.20p.