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Election uncertainty among factors leading Macquarie to downgrade British gas owner Centrica to 'hold'

Macquarie also cut its target price for Centrica to 220p and downgraded its 2017 earnings per share estimate by 17%, taking it to 9% below consensus
Gas rings
By contrast, in a separate note, Macquarie upgraded its rating for power distribution group National Grid to 'neutral'

Macquarie has downgraded its rating for British Gas owner Centrica PLC (LON:CNA) to ‘hold’ from ‘buy’ as it thinks the 2017 catalysts that lay behind its positive stance are not likely to lead to a re-rating, with the surprise UK election call also creating uncertainty.

In a note to clients, the Australian broker’s analysts said: “We were bulls on Centrica at the start of the year based on a number of positive tailwinds: higher oil and gas prices, weaker sterling, a £750mln cost cutting programme ahead of schedule and finally a shift in strategy focusing on connected home and distributed generation which in our view made sense.”

READ: Credit Suisse downgrades Centrica to ‘neutral’

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But, they added, "we have re-examined the buy case on this stock and now we do not see these tailwinds being reflected in increases to earnings per share forecasts."

In fact, the analysts said, they have downgraded their 2017 EPS estimate by 17%, taking it to 9% below consensus, to reflect margin reduction and customer losses in retail; increased losses in connected home; power and gas prices staying subdued; lower capacity auction results; and higher financing costs.

Macquarie also sees risk of utilities becoming a "political punchbag" again

They also pointed out: “The Green paper on ‘Consumer’ proposed by the Government will likely be postponed to after the June 8th General Election.

“The contents however, will likely appear in the electoral manifestos of the political parties. We see the risk of utilities becoming, again, a political punchbag and price caps are likely.”

Macquarie has reduced its target price for Centrica to 220p a share, with the FTSE 100-listed firm’s stock drifting 0.4%, or 0.9p lower to 205.3p in late morning trading.

But National Grid’s rating upgraded to neutral by Macquarie

By contrast, in a separate note, Macquarie upgraded its rating for power distribution group National Grid PLC (LON:NG.) to ‘hold’ from ‘sell’ with a raised target price of 1,005p, up from 880p, having updated its model to reflect the firm’s sale of its Gas Distribution units.

The broker’s analysts said it had also updated its model for National Grid with a higher dollar/sterling rate, an increased UK retail price index, and current iterations on revenue timing from regulator Ofgem.

In reaction to the update, National Grid’s shares on the FTSE 100 index were 0.5%, or 5.1p higher at 995.4p.

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