HSBC has upgraded its rating for British gas-owner Centrica PLC (LON:CNA) after The Queen’s Speech yesterday detailing the plans of Theresa May’s new government revealed no intention for tariff caps, although they think some intervention in the energy market is still likely.
In a note to clients, the global bank’s analysts raised their stance on the FTSE 100-listed firm to ‘hold’ from ‘reduce’ with an increased target price of 202p, up from 187p.
In early morning trading, Centrica shares edged 0.1%, or 0.3p higher at 206.7p.
The HSBC analysts noted that Greg Clark, the Secretary of State for Business, Energy and Industrial Strategy, sent an open letter to the chief executive of energy regulator Ofgem following the Queen’s speech to Parliament.
They said in it he asked Ofgem to advise him “on what action you intend to take in three respects: Safeguarding customers on the poorest value tariffs; Ensuring that micro businesses are fairly treated; Considering the future of standard variable tariffs.”
More measured intervention in the supply market
The analysts added that “in light of the above political development” they have adjusted down their previous WACC (weighted average cost of capital) assumption for Centrica “because we believe that there will be more measured intervention in the supply market, as advised by Ofgem.”
They said that in their increased sum-of-the -parts valuation for Centrica they have reduced the discount for Centrica’s UK Home to 10% from 20% and removed the discount for its North American business.
However, they have reduced their yield expectations for the shares to 5.9% from 6.2% as they “think it will be politically difficult for Centrica to raise its dividend in the current political climate in the UK so are keeping the dividend assumption flat at 12p.”