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Investing.com -- Centrica (LON:CNA) was upgraded to “overweight” by analysts at Morgan Stanley and named a top pick after securing investments in Sizewell C and Grain LNG that analysts said will lift earnings, improve valuation, and confirm management’s ability to deliver on its capital expenditure plan.
The energy and services company has already committed about 70% of its £4.3 billion 2024-2028 capital program, including £700 million in the two projects.
These deals are forecast to generate internal rates of return of 13% and 14%, while also increasing Centrica’s contracted and regulated revenue streams.
Morgan Stanley now project 2029 EBITDA of £1.6 billion, or 8% above consensus. With deployment of the remaining £1.3 billion in uncommitted capital, EBITDA is forecast at £1.7 billion, representing an 18% upside.
“Following a number of recent investment announcements, we see growing conviction in management’s ability to deploy capex into value accretive projects, and see the next step of Centrica’s equity story starting to take shape,” the brokerage said.
Valuation estimates have been raised alongside the earnings outlook. The new base case sum-of-the-parts valuation is 210p per share, which reflects some of the unallocated capital and implies 26% upside from current trading.
Even without deploying the remaining £1.3 billion, the report values shares at 190p, or 15% higher than current levels.
Morgan Stanley flagged the benefits of Centrica’s growing base of long-term earnings. The proportion of contracted revenues is expected to climb from 5% today to more than 30% by 2030, supported by the Sizewell C stake, Grain LNG’s long-term contracts, Irish capacity market payments, and MAP assets. “Valuation risk now skewed positively,” the brokerage said.
Centrica’s recent progress marks a shift from the years following the energy crisis, when its large cash balance was seen primarily as a vehicle for buybacks and dividends rather than reinvestment.
The new investments, analysts said, show that the company is now “successfully committing capital to value accretive investment opportunities.”
The Sizewell C deal, which involves a net investment of £500 million, is forecast to deliver a 12.9% return on equity and add 15p per share in net present value.
Grain LNG, backed by contracts extending beyond 2040, contributes 2p per share but offers visibility and stability.
Analysts expect Centrica to grow earnings per share by 10% annually through 2030, with a dividend yield of 3.3%, resulting in a total shareholder return of 13%.
They also anticipate the current £2 billion buyback program could be extended by a further £500 million into 2026.
The note cited risks, including the possibility that management does not follow through on capital deployment or halts buybacks after the current program, persistent challenges in trading, and rising competition in the UK retail energy market.
“Centrica becomes a Top Pick and our preferred UK Utility, with comparatively low sensitivity to yields ahead of UK budget,” the brokerage said.