Credit Suisse upgrades Centrica after recent falls

10th Mar 2014 09:46

Credit Suisse has raised its recommendation for British Gas owner Centrica from 'underperform' to 'neutral' after the stock's recent underperformance."Centrica has been the worst performing utility across the past six months, falling circa 18% versus the pan-euro sector up 22%," the bank said."Our 2014 earnings per share estimates have fallen circa 16% since the November profit warning. We think the risks are now reflected in the share price, and forecast an end to negative momentum."Credit Suisse said it sees the potential for Centrica's upstream business to stabilise, given that: Combined Cycle Gas Turbine (CCGT) power station assets are at trough profitability; downgrades at the Rough UK gas storage facility have largely been factored in; and the US-Europe commodity environment is now more favourable.Meanwhile, the government's 17-month price freeze into the General Election in May 2015 means that "political and media attention - hence the risk premium on British Gas - is now at a peak and may recede in coming months", Credit Suisse said."In any event, we see a 20-month price freeze from May 2015 (as proposed by Labour), as unlikely. Competition from new entrants would be reduced, and could potentially mean at least one of the 'big six' players exits. Moving costs to taxation to fund a freeze is a far more likely outcome, in our view."Ahead of Centrica's first-quarter trading update on May 12th, Credit Suisse said that an improving economy and higher disposable incomes should benefit the lead indicators for British Gas which have suffered badly due to austerity."It is also possible BG Residential wins back some of the approximately 520,000 (about 4%) accounts lost during the recent price rise," the bank said.The target price has been left unchanged at 310p.The bank said that the stock's valuation is back at the long-term average; the shares trade at a price-to-earnings multiple of 11.8 on estimated earnings for 2015, the middle of their historic range of 10.3 to 13.4.The stock was up 1.6% at 329.81p on Monday morning, but still 17% lower than it was six months ago.BC