Broker snap: Centrica is Nomura's top UK pick

12th Jan 2010 09:06

Having selected Centrica as its top UK pick for 2010, Nomura Securities has decided to 'put a little more meat on the bones' and explain why.For a stock that 'delivers sector beating EPS [earnings per share] growth' Centrica's valuation of 11.4 times forecast 2010 earnings lags undeservedly behind the 12.9 price/earnings ratio of its integrated peers, Nomura believes. 'This valuation is more compelling if we strip out the benefit of free carbon elsewhere in the sector (11.6x [Centrica] vs. 14.5x [peers]),' Nomura analyst John Musk writes.The company generates a lot of free cash flow. Nomura is estimating capital expenditure of $4bn for 2010-12, putting its forecast towards the top end of market expectations, but after this capital expenditure free cash flow yields 'are a healthy 6-8%', the broker reckons, while 'a low 1x net debt EBITDA [earnings before interest, tax, depreciation and amortisation] ratio improves over the three years,' giving headroom for dividend growth even higher than the 5% that Nomura is assuming.'All this comes with relatively low risks given the more integrated nature of the group post 2009 acquisitions,' Nomura opines, adding that Centrica (CNA) 'now has 50% equity hedge on energy (60% on CNA's own estimates).'The broker has a 340p price target for the stock.