Centrica: Raising Our Fair Value Estimate To GBX 180 on Recent Positive Developments; Shares Cheap

We raise our fair value estimate for no-moat Centrica CNA to GBX 180 from GBX 140 on: 1) the material one-off of the first-half of 2023 from the recoupment of incremental costs in 2021-22 related to customers who flocked to standard variable tariffs amid the energy crisis, 2) the postponement of the closure of Heysham 1 and Hartlepool nuclear units from 2024 to 2027, 3) the increase in the available storage capacity of Rough from 30 billion cubic feet to 54 bcf, and 4) the GBP 450 million increase in the share buyback plan. Our new fair value estimate involves a 2023 P/E of 5.6, free cash flow yield of 16%, and dividend yield of 2.2%. Shares are undervalued.

The incorporation of those drivers lead us to increase our 2023-27 adjusted EPS estimates by 58% on average. We now forecast an average annual adjusted EPS decline of 17% by 2027 versus 20% previously. Key to this decline remains the fall in energy and marketing trading profits after a stellar 2022, normalization of power and gas prices that we expect, nuclear plant closures, and a decline in gas production, which will more than offset the accretion from the GBP 1 billion share repurchase program to be completed in 2023, lower financial costs in the wake of lower gross debt, and earnings from growth investments. For those, we assume an internal rate of return of 8.5%, which is the midpoint of the 7%-10% targeted range. This implies a return on capital employed of 5.9%.

Our new 2023-25 EPS estimates are 38% above FactSet consensus, which has yet to incorporate the recent positive developments that drove the increase in our fair value and earnings estimates. This pending consensus adjustment combined with the execution of the balance of the share buyback plan should boost the share price.

We project Centrica’s net cash position to increase from GBP 1.2 billion at the end of 2022 to GBP 2.7 billion at the end of 2027, leaving ample room for additional share buybacks.