Interactive Investor

Reasons to own cash-rich Centrica and BP shares

These two high-profile FTSE 100 companies are on a City analyst’s ‘buy’ list. Graeme Evans explains what’s so attractive about the pair.

8th May 2024 13:23

by Graeme Evans from interactive investor

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Shareholder standing on a pile of cash 600

Confidence in BP (LSE:BP.) targets and the belief that Centrica (LSE:CNA) shares are carrying too large a discount today underpinned a City bank’s “buy” stance on the widely held FTSE 100 pair.

UBS continues to support BP with a 600p price estimate, which compares with this afternoon’s 496p after two days of selling caused by oil price and post-results weakness.

British Gas owner Centrica rose 1.6p to 132.75p after UBS upgraded its position from “Neutral” and increased its target price by 5p to 170p.

The support follows a 26% decline for shares from their highs in September, a de-rating linked to the potential for value destruction on Centrica’s large cash pile of more than £2.5 billion.

UBS said investors appear fearful of cost overruns on any potential involvement in new-build nuclear, as well as the lack of visibility at the company’s large trading businesses.

The bank believes the current discount in the price is unwarranted: “We think these concerns overlook the fact Centrica is a fundamentally changed business across the past four years.

“The cost base has been reduced so that the businesses are structurally profitable. And there are no longer recurring exceptional costs reported below the line.”

Centrica's projected dividend yield of 3.6% is the lowest in the sector, but UBS estimates that this could be in line with other UK utilities at 4.9% should it return all its cash.

The backing for BP followed a negative reaction to first quarter results, when net income of $2.72 billion (£2.2 billion) came in 5% below consensus on a higher tax rate and interest costs.

Cash flow from operations was 2% below consensus, while a large working capital build caused net debt to rise by about 10% quarter-on-quarter to $24 billion.

BP maintained the quarterly rate of buybacks at $1.75 billion, but did not extend guidance beyond the first half and left the dividend unchanged at 7.27 US cents a share.

For UBS, however, the main takeaway from the update concerned the company’s confidence in its 2025 earnings guidance, which currently sits 16% above the City consensus.

Reiterating its buy rating, the bank highlighted the potential for earnings and dividend growth and said the valuation looked undemanding at a 10% discount versus peers.

BP reported an average Brent crude price of $83.16 a barrel in the quarter, down from $84.34 in the previous three months. The UK benchmark price for natural gas fell sharply to 68.72p a therm, from 98.68p in the fourth quarter of 2023 and 130.81p a year earlier.

Brent Crude futures were today at $82.14 a barrel, representing a decline of $10 on the level seen at the height of the Middle East tensions in mid-April.

Signs of a slowing US economy and speculation that major oil producers could increase output at their next OPEC+ meeting on 1 June contributed to the downward price pressure.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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