The Canadian investment bank previously expected the stock to ‘outperform’ its sector peers, but it reckons the “harsher commodity environment” and rising competitive and regulatory pressures will hit operating cash flow, which in turn will mean the current 12p dividend is unsustainable.
“We see most pressure on 2019, and while CNA may therefore maintain the 12p/sh for 2018, we believe the dividend will have to be reduced in due course,” read a note to clients on Wednesday.
“We assume an 8p/sh dividend from 2019, with a 75% pay-out ratio thereafter, whilst also removing the dilutive scrip dividend option.”
Needs to win back customers
Aside from the dividend, RBC also raised concerns over the lack of growth across the business and it remains “unconvinced” that areas such as Connected Home or Distributed Energy and Power will ever be significant earners for the group.
“In order to become more positive on CNA we believe the company must address the significant customer losses it is currently experiencing in its retail supply business,” said analysts.
“We also need further evidence of strong growth in new markets such as Connected Homes and Distributed Energy and Power, both of which appear set to miss management revenue targets.”
Looks expensive versus peers
RBC has slashed its earnings estimates for the next three years by around 20%, which means shares now look “relatively expensive”, even though they have fallen by more than 10% since last summer.
“Based on our new estimates CNA is trading on a 2019E P/E of ~12.5x, which looks expensive versus a similar multiple for SSE’s higher quality asset mix and only ~1x lower than the safer & predictable UK regulated names.
“Given the lack of growth (5yr EPS CAGR 17A-22E of 0.6%) this seems a relatively rich multiple, and CNA is trading at a 10-15% P/E premium to other ‘challenged’ UK retailers such as M&S, Kingfisher and Next.”
Centrica shares were down 2.3% on Wednesday morning to 137.4, just above RBC’s new target price of 130p (cut from 185p).