Centrica PLC (LSE:CNA) shares offer an attractive valuation given the energy supplier’s “strong tailwinds” from higher commodity prices, say analysts at RBC Capital Markets.
The FTSE 100-listed British Gas owner was kept on an ‘outperform’ rating by RBC, along with a share price target of 130p, well above a market valuation of around 97p on Thursday morning.
“Current market rates continue to provide a tailwind for Centrica and remain materially above historical averages,” RBC said.
“We think Centrica continues to screen attractively on valuation” and provides “significant upside potential,” analysts said.
There was some caution in the note, though, with a suggestion that the ongoing energy crisis has highlighted "the need for significant reform, something that Centrica itself has been calling for from regulator Ofgem.
Softening commodity prices will also likely hit Centrica in 2023 and 2024 too, seeing its pre-adjusted earnings potentially fall from a 2022 peak of £3.5bn, to £2.16bn and £2.5bn in the coming years, RBC said, adding that the company's “core retail business remains challenged,” and is unlikely to “see a quick fix.”
Despite this, Centrica is sitting on £1bn in net cash, said RBC, opening the door for future buybacks higher cash flow generation in the coming years.
Last week saw Centrica lift full-year profit guidance, given higher energy prices, putting it on course for its highest-ever earnings.
With gas prices jumping after Russia attacked Ukraine in early 2021, dragging up wholesale energy prices as a result, power companies such as Centrica have enjoyed windfall profits, for which there have been loud calls for and against.