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Centrica faces headwnds, Goldman says, though it should be able to resume dividend growth

Parliament is set to indulge in another frenzy of utility company bashing on Thursday
Gas rings
Goldman Sachs is cool on Centrica's investment appeal

With the House of Commons due to debate energy prices tomorrow, Goldman Sachs sees no reason to abandon its negative view of Centrica PLC (LON:CNA).

The heavyweight investment bank has a negative view on UK energy supplies, does not much like the British Gas owner’s rising pension costs and believes the group’s gas contract with Cheniere will be loss-making (based on Goldman’s gas price assumptions).

“We assume the contract will incur a loss of US$1.8/mmbtu or £130mln. Every $1/mmbtu reduction in the loss would represent a 6% positive impact to EPS,” Goldman said.   

Goldman Sachs forecasts that funds from operations (FFO) as a proportion of debt will rise to 38%, above the group’s target level of 35%, the group faces a number of head-winds over the next five years.

While these are unlikely to hamper the dividend growth so beloved of investors in utility companies, they have the potential to affect the company’s ability to make further investments above the current targeted levels.

“With regulatory uncertainty around UK energy supply (a significant driver of Centrica’s free cash flow [FCF]; we estimate UK energy supply accounted for 45% of 2016 FCF), we see stronger EPS growth, greater visibility and less business-model risk elsewhere,” Goldman said, as it reiterated its ‘sell’ recommendation.

It prefers Enel, Iberdola and E.On in the sector.

Goldman has trimmed its 12-month price target from 218p to 214p, reflecting minor changes to its estimates. 


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