Goldman Sachs gave a lift to British Gas owner Centrica PLC (LON:CNA) on Tuesday, double-upgrading its rating to 'buy' from 'sell' as it believes recent underperformance is overdone.
The US investment bank also lifted its target price for the FTSE 100-listed firm to 176p from 174p, with the shares currently trading at 148.90p each, up 2.4% on Monday’s close.
READ: Centrica and SSE shares gain as Ofgem energy price cap removes uncertainty
In a note to clients, Goldman’s analysts noted that Centrica shares have fallen by around 40% over the last two years, weighed down by rising competition and increased political regulatory scrutiny within UK energy supply.
But, they said: "What we believe is being overlooked is the impact of higher commodity prices. Year to date, gas and power prices have rallied 40% and 35%, respectively."
The analysts added: "Even taking a further £50mln reduction in UK energy supply, we believe that the higher commodity prices add 26% earnings per share growth out to FY2020. This allows for the company to deliver a free cash flow yield (post total capex, pre dividends) of greater than 10% and cover its 8.4% 2021E dividend yield (27% premium to peers).”
They concluded: "With the stock trading at 9x 2021E price-to-earnings (a 20% discount to peers), we believe that Centrica offers good value at these levels."