Investec upgrades Centrica to 'buy'

28th Jul 2015 13:34

(ShareCast News) - Investec upgraded shares of Centrica to 'buy' from 'hold' and raised its price target to 300p from 250p for two reasons.Firstly, it said fear of a potential 'black sky' restructuring of the UK energy sector has now abated. Secondly, an imminent strategy day gives Centrica the chance to resets its business model to meet new market and regulator realities, with greater capital and operating focus.Investec expects the immediate focus of the strategy day to be on the two main headwinds for Centrica's business model: regulatory/efficiency challenges in its core UK downstream business and low energy prices upstream.It argued that efficiencies are both desirable and feasible in both areas. "Upstream, we expect further capex cuts and deeper operating cost cuts than those already announced. In UK downstream, we see competitive and regulatory pressures driving £200m+ operating efficiencies, but the pace of capex will increase, as downstream markets are transformed."Investec said that whatever strategic path the new chief executive sets will take time to execute, but should put issues of governance, customer engagement and environmental leadership at its core.The power portfolio needs to be restructured, but can act as a base for a more radical, low-carbon generation fleet in future, it said.Investec said further valuation upside for Centrica will depend on the successful execution of such a strategy, and on no further deterioration in underlying fossil-fuel prices to which its earnings are ultimately correlated.At 14:46, shares were down 0.8% at 271.60p.