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Broker sees Centrica losing its spark

Published: 10:00 22 Sep 2016 BST

Centrica gas production engineers

The energy and utility industry was in the City's focus on Thursday after Jefferies International downgraded two of its biggest players.

Jefferies cut British Gas owner Centrica PLC (LON:CNA) and power station operator Drax Group Plc (LON:DRX) to ‘underperform’.

However, it left its ratings on other players such as SSE plc (LON:SSE) unchanged.

The broker said it expected significant headwinds in UK domestic energy supply and power generation profits that are not priced in.

It predicted a 22% hit to energy supply profits and a 10%-15% downside to UK power and gas prices.

But it said SSE, which it kept as a ‘hold’, had a diverse business and strong balance sheet that left it well-placed “to weather these fast-approaching storms”.

Reducing its target price on Centrica to 190p from 235p, Jefferies said: “Whilst we expect the delivery of a progressive dividend, we believe retail and gas price headwinds are not fully reflected in the current share price.”

The broker increased its target price on Drax to 240p from 210p, adding: “Following severe under-performance in 2015, Drax's share price has risen 50% in 2016.

“However, we expect this outperformance to unwind due to headwinds in the UK power market.

“We see circa 10% downside to current UK forward power prices due to growing renewables and interconnection capacity, weak demand and a lower UK gas price.”

Elsewhere, Peel Hunt downgraded Acacia Mining PLC (LON:ACA), formerly known as African Barrick Gold, to ‘reduce’ from ‘hold’ on what it described as a toppy valuation.

Peel analysts said: “Acacia was one of the best performers during the first-half run in the gold price.

“We feel the re-rating went too far and despite the recent correction, we see room for further downside.”

But Liberum Capital was more upbeat on commodity trader and miner Glencore PLC (LON:GLEN), upgrading it to a ‘hold’ from ‘sell’ due to changes in Chinese coal policy.

“Glencore benefits in the long term from these changes,” LIberum analysts said. “They not only raise coal prices, but also make Chinese coal miners even less cost competitive by dropping productivity.”

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