Centrica PLC (LON:CAN) shares slipped after Jefferies downgraded its recommendation to ‘hold’ from ‘buy’ and cut its target price to 125p from 170p.
“We downgrade Centrica to hold, given we see material downside risk to 2019-20 earnings, borderline credit metrics and limited market-to-market benefits of higher commodity prices in the medium-term,” Jefferies said.
“With this, we see a timely disposal of Centrica's 20% nuclear stake as critical to protect its balance sheet against another potential hit.”
Jefferies said it expects the British Gas owner to publish weak 2018 results in February, which will weigh on the shares.
For 2019, the broker forecasts an 8% decline in earnings per share (EPS) due to operational issues in oil and gas and nuclear assets, the suspension of UK capacity market payments, volatile commodity prices, high customer churn rates at British Gas and the impact of the regulator’s energy price cap.
“With this, we see 10% downside risk to 2019-20 consensus EPS,” it said.
Jefferies says dividend 'hanging by a thread'
The broker cut its 2018-20 earnings (EBIT) and EPS forecasts by 8% and 15%, respectively, citing a more pessimistic outlook for UK retail, a drop in commodity prices, lower exploration and production output and 40% effective tax rate.
Jefferies added: “With materially lower 2018-20 earnings forecasts, we expect Centrica's adjusted operating cash flow to dip below the company's £2.1-2.3bn guidance range in 2018-19, and be at the lower end of the range in 2020.”
“With this, we see borderline credit metrics for Centrica (average 2018-20 retained cash flow/net debt at the key 25% threshold for its current BBB+ rating) and 12p dividend per share hanging by a thread.”
If UK power and gas prices fall a further 20%, Jefferies predicts 2019-20 cash cover for dividends of below 1x and a one-notch credit rating downgrade.
Centrica nuclear stake disposal needed to improve balance sheet
Centrica plans to sell its 20% stake in eight British power plants by the end of 2020.
Jefferies estimates a £1bn valuation of the stake would be needed to reinforce Centrica’s balance sheet and provide sufficient protection against a potential commodity-related shock.
In November, Centrica said it anticipates adjusted EPS to fall to 11.5p in 2018 from 12.6p a year ago after dealing with operational issues in the oil and gas arm, outages in the nuclear business, tough competition in the energy supply market.
READ: British Gas owner Centrica expects energy price cap to hit 2019 earnings
In the first quarter of 2019, it expects to take a £70mln hit related to the energy price cap that came into effect in January.
In morning trading, shares fell 4.95 to 130.5p.