Broker snap: Barclays downgrades Centrica and SSE

15th Jan 2014 11:51

Predicting a cost squeeze regardless of the result of the next UK general election, Barclays has downgraded both Centrica and SSE to 'underweight'.In a research note, utilities analysts at the bank said a retail margin squeeze appeared to be inevitable, as declining consumption and other forecast cost pressures cannot be met with further price increases from the 'Big 6' utilities as the government would not sanction it. "We estimate that the inability to pass these costs through to end users could reduce "Big 6" UK utility retail margins by 3.2 percentage points year-on-year," Barclays said. With the government pushing ahead with measures to increase energy supply competition, such as simplified tariffs, collective switching and accelerated switching times, Barclays seemed sceptical that the intention of Centrica and SSE to generate 5-6% supply margin will be thwarted. It added: "UK energy supply accounts for approximately 40% of Centrica's and approximately 20% of SSE's current net income. With margins under pressure, we now forecast EPS 8% below consensus for SSE by March 2016 expectations, and 19% below consensus for Centrica by 2015. "If the next government does freeze retail prices, we forecast consensus EPS downgrades of up to 22% and 32% respectively. This scenario would potentially trigger dividend cuts for both stocks and, in SSE's case, a rights issue."Barclays, which has been bullish on UK energy, said it would instead recommend exposure to the sector through its 'overweights' on Drax, Infinis and Pennon.OH