Centrica to get hit from both sides, UBS says

18th Feb 2014 11:18

Increased regulatory scrutiny, even if unjustified, of Centrica's pricing structure would hit the company's margins, adding to the pressures coming from other fronts, analysts at UBS wrote on Tuesday.In the wake of the UK Energy Secretary's letter to Ofgem, the Swiss broker's analysts wrote that the vertically integrated exploration and gas and electricity provider might see all its retail margins fall towards 4% so as to reduce political risk. All else equal that would bite into its earnings per share (EPS) by 16%, resulting in a fair value estimate for the stock of 300p. Labour could move to freeze tariffs, alongside a possible retail re-regulation. That would cut EPS by a further 13-15% (Fair value: 240p). Likewise, the government might act to restrict its share of the retail market to 20%, which would lop off about another 5% of its EPS (Fair value: 290p). Neither of those moves would benefit consumers, UBS wrote, although they could limit the country's energy security by handicapping the firm's ability to write long-term contracts, such as those for liquefied natural gas (LNG). Centrica also faced lower margins from wholesale natural gas Stateside, additional weakness in gas storage and adverse movements in US dollar FX rates. UBS cut its price target on the shares to 280p from 340p and downgraded its recommendation on the shares to 'sell' from 'neutral'. They saw "a more significant risk to the downside even from current levels".AB