UBS fuels up the energy debate with Centrica downgrade
Centrica was given another blow after UBS downgraded its rating on the stock from sell to neutral, causing shares to tumble over three per cent earlier today.
UBS also lowered its price target on the energy giant, which owns big six supplier British Gas, from 340p to 280p.
The analysts attributed the downgrade to increasing political risk for the company, after energy secretary Ed Davey wrote to the regulators asking them to scrutinise British Gas’ high gas supply margin.
“We see nothing untoward in Centrica's high gas/low electricity pricing structure, but this strategy is likely now unsustainable,” said the research.
We see all Centrica retail margins moving to four per cent to reduce political risk – cutting earnings per share by 10-16 per cent, all else equal – and we still see significant downside risk from political intervention.
Davey’s letter puts further political pressure on Centrica. Last September Labour leader Ed Miliband pledged to freeze energy bills until 2017 if elected, wiping billions off the value of FTSE 100-listed Centrica and peer SSE.
“We see little consumer benefit from either political intervention scenario, which would likely cut average tariffs by far less than three per cent structurally,” said the research.
And intervention could impact energy security of supply by reducing companies' ability to write long-term contracts, cutting investment confidence, and impacting balance sheets – reducing scope for generation capacity investment.However, ahead of the 2015 election, these concerns may not stop political parties proposing and (potentially) pursuing such policies.”