Centrica cut to 'sell' by Deutsche Bank on UK election risk

24th Mar 2015 10:04

UK utility giant Centrica had its rating cut to 'sell' from 'hold' by Deutsche Bank who cited the upcoming UK elections as a risk."The UK's energy utilities are facing the riskiest general election since 1992 and Centrica looks most exposed," said Deutsche Bank.It believes Centrica's shares could be worth at least 20% less under a Labour-led government than a Conservative one."The valuation gap could be much bigger given that Labour leader Ed Miliband's mooted 10% energy retail price cut would wipe out Centrica's group earnings.The outcome looks too close to call yet the shares appear to be pricing in a Conservative win," added Deutsche Bank.It cut the target price on Centrica stock to 225p from 280p.For further context, Deutsche noted that in the month before the 1992 UK election UK utility shares dropped 9% on the expectation of a Labour victory but on the day after the election, when the Conservatives unexpectedly prevailed, UK utility shares jumped almost 20%."We believe the stakes are similar this year but will the sector see such a happy ending? Current polls suggest the outcome of the election is finely balanced, and it may prove difficult for either main party to form a stable government after the election," added the bank.It went on to add that the outlook energy retail profits and the valuation of regulated networks would both be affected by the election outcome."We estimate that a 1% reduction in retail margins would reduce Centrica's equity value by 10%," said Deutsche.