Broker tips: Centrica, Stagecoach, National Grid

5th May 2016 15:45

(ShareCast News) - Centrica's shares fell as HSBC retained its 'hold' rating on the stock, citing a risk of a credit downgrade by Moody's from Baa1 to Baa2.However, the bank raised Centrica's target price to 250p from 200p as it believes the owner of British Gas will benefit from cost cutting measures and an improvement in commodity prices."The recent trading statement confirmed that first quarter performance was in line with guidance and that cost cutting was on track but that British Gas Residential (BGR) had lost 1.5% of its residential customers," the lender said."The next potential catalyst is the credit rating decision by Moody's (Centrica is rated Baa1 but is on review for downgrade). Its metrics look challenged for 2016, but cost cutting and commodity price improvements could improve metrics in 2017."As part of its £750m cost-cutting programme, announced in July last year, Centrica has slashed 2,000 jobs and expects to achieve a reduction of around 3,000 roles by the end of the year. The company expects to achieve £200m in savings in 2016 and £500m by 2018."We believe Centrica has scope to deliver further cost savings to offset competitive pressure," HSBC said."We increase our 2016 earnings per share (EPS) estimate by 2.4% and 2017 EPS estimate by 14%. We assume an 8% cut in upstream costs in 2017 and that Centrica can maintain margins in British Gas Residential at 7%.These savings in our view increase our confidence that a 12p dividend is sustainable."The broker note came as Centrica announced plans to raise around £750m in a placing to fund acquisitions and cut debt.The company said it plans to issue around 350 million shares or 7% of its current issued share capital.The company said the placing will enable it to secure two "prioritised and attractive" acquisitions to accelerate growth and develop capabilities in its customer-facing activities and reduce pressure on its credit metrics and its current strong investment grade credit ratings. UBS upgraded Stagecoach to 'buy' from 'neutral', pointing to recent weakness in the share price and expected catalysts over the next 12 months.The bank said that while full-year 2016 was tough, with slowing revenue trends and one-off effects related to adverse weather, full-year 2017 looks more promising.UBS argued that as fuel hedges start to roll off meaningfully, Stagecoach will see a tailwind in its opex spread out over the coming three years.In addition, it said losses in the Megabus Europe business should start to narrow as the ramp-up continues.UBS also said the shortlisting of Stagecoach for the South Western Rail franchise provides a near-term catalyst which could be worth up to 30p a share if won.Finally, it pointed out that Stagecoach still has the strongest balance sheet in the sector and at the current share price has a dividend yield of 4.3% rising to more than 6% by 2020.UBS cut its price target on the stock to 295p from 315p. National Grid's strategy could be expected to pay dividends, JP Morgan said.The company's sell-down strategy in Gas Distribution was both "sound and simplistic", analyst Christopher Laybutt said in a research note sent to clients.When it completed in early 2017 the transaction could be expected to deliver value of up to 30p per share and a 100p special dividend.Furthermore, its US regulated arm looked set to turn a corner while its UK operations were performing above expectations.Under a 'blue-sky' scenario, the long overdue rate cases filed over the last six months might - if successful - deliver up to 6-7% earnings accretion from fiscal year 2018 onwards.The dividend was continuing to grow more quickly than the retail price index too, supported by the firm's operating cash-flow and strong balance sheet, the broker went on to explain.Regulatory risk in the UK was also seen as low through into the next decade.Laybutt boosted his target price on the shares from 902p to 1.050p and lifted his recommendation from 'neutral' to 'overweight'.