HSBC downgrades Centrica on political risk, concerns about new businesses
HSBC has downgraded Centrica to 'reduce' due to political risk surrounding the energy company over calls for self-regulation and concerns over its new business ventures.
The bank downgraded the FTSE 100 company to 'reduce' from 'hold' and cut its price target to 200p from 223p, assuming a 6% dividend yield from 5% before.
Centrica said it will not raise energy prices for domestic customers from 1 April, while its its five rivals, EDF Energy. E.On, Npower, ScottishPower and SSE, have decided to hike rates, ignoring politicians' and regulators' calls for self-regulation.
HSBC claims that the "political noise" on this issue is growing as Iain Wright, the chair of the House of Commons’ Business Energy and Industrial Strategy Committee, held a debate on energy prices on Thursday and according to Reuters he said the government would set out proposals "shortly" to address issues in the energy market.
After 2017, HSBC said Centrica will not generate high levels of free cash flow as it will have to continue to invest in new businesses for potential earnings growth in the future, which concerns the bank.
Centrica plans to invest between £400-600m per year in upstream activities in the North Sea and spend £100m on investment in technology to enhance its connected home offer and its distributed energy and power business, which are both loss-making.
HSBC warned that this new paradigm – growth through technology associated with the connected home and distributed generation – is “unproven”.
The company maintained its 12p dividend as expected in 2016 and indicated that it will restore a progressive dividend when net debt is between £2.5-£3bn, which HSBC thinks is deliverable in this year, but the broker assumes a flat dividend depending on assurances of no political intervention.
Shares in Centrica were down 0.51% to 216.70p at 0816 GMT.