Centrica looks past a weaker start to the year as nuclear decision looms

Centrica PLC faces near-term headwinds from mild weather and weak gas storage profits, leading to reduced full-year earnings forecasts; however, UBS maintains a 'buy' rating with a price target of 180p, citing a potential 13% upside. The firm's future hinges on the Sizewell C nuclear project, with a potential £1.5-2.0 billion equity commitment, expected to provide regulated returns during construction and beyond. Centrica's strategic shift towards regulated and quasi-regulated assets, potentially comprising 37% of enterprise value by 2030, aims to stabilize earnings and attract investors seeking stable cash flows.

Analysis

Centrica PLC is navigating near-term headwinds, including a weaker start to the year attributed to mild spring weather and subdued gas storage profits, which prompted a reduction in full-year earnings forecasts. Despite these short-term challenges, analyst firm UBS maintains a constructive outlook, reaffirming its 'buy' rating and increasing its price target from 175p to 180p, implying over 13% potential upside from the current share price of 159p. The pivotal event for Centrica is the anticipated final investment decision on the Sizewell C nuclear project in mid-June. This project is positioned as transformational, with Centrica planning to commit £1.5 billion to £2.0 billion in equity and a share of project debt, potentially totaling up to £5.7 billion. The investment is expected to yield a regulated return during construction and for at least three years post-completion, with a target real return on equity exceeding the 6.35% benchmark for UK transmission networks, and an estimated 5% return even with cost overruns. Strategically, Sizewell C addresses a looming UK nuclear energy supply gap, with several existing reactors scheduled for closure by 2030, and aims to provide long-term, low-carbon baseload power. Beyond nuclear, Centrica is strategically increasing its exposure to regulated and quasi-regulated assets, such as smart metering and low-carbon generation, which could constitute up to 37% of its enterprise value by 2030 and contribute approximately 4p per share in earnings with nominal returns of 8%. This shift is intended to stabilize earnings and reduce volatility from commodity exposure. Centrica currently trades at approximately 4.7 times its expected 2026 enterprise value to EBITDA, a multiple UBS considers undervalued, suggesting a fairer valuation closer to 5.3x, potentially rising to 7.0x as more capital is allocated to regulated assets. The company offers a 3.5% dividend yield, fully covered and paid in cash, complemented by an ongoing £650 million share buyback program extending through the end of 2025.

Key Decisions for Investors

• Investors should consider looking beyond Centrica's current short-term operational challenges, focusing on the significant long-term value potential tied to the upcoming Sizewell C nuclear project decision and its projected regulated returns.
• The strategic pivot towards an increased proportion of regulated and quasi-regulated assets in Centrica's portfolio by 2030 may offer enhanced earnings stability and de-risk the investment profile, warranting close monitoring.
• Given UBS's assessment of undervaluation at the current 4.7x 2026 EV/EBITDA multiple, coupled with a 3.5% dividend yield and an active share buyback program, long-term investors might find the current valuation an attractive entry point, contingent on the positive outcome of the Sizewell C decision.