Centrica's nuclear option could quietly boost value

Jefferies estimates Centrica's potential involvement in the Sizewell C nuclear project could increase its market value by approximately 5%, potentially adding 10p-14p per share. This valuation is based on assumptions of a 10% IRR and a 20% equity stake with £150 million annual investment over 15 years, against the backdrop of the UK government's £14.2 billion commitment to the £30-40 billion project. While Jefferies has slightly trimmed its 2025 earnings forecasts due to weather and commodity factors, it maintains a 'buy' rating and 180p price target, highlighting Sizewell C as a source of visibility and optionality for Centrica amid volatile energy markets.

Analysis

Jefferies identifies a significant potential value driver for Centrica PLC (CNA) through its prospective involvement in the Sizewell C nuclear project, estimating this could augment Centrica's market value by approximately 5%, equivalent to 10p per share. This projection is based on a scenario involving a 20% equity stake, £150 million in annual investment over 15 years, and a 10% internal rate of return, with more optimistic assumptions potentially yielding a 14p per share uplift, or a 9% market capitalization boost. This development is contextualized by the UK government's £14.2 billion commitment to the Sizewell C project, whose total costs are estimated between £30 billion and £40 billion, and reports suggesting a deal involving investors might be announced as early as July. Such a long-term infrastructure investment aligns with Centrica's stated £4 billion capital allocation plan for 2025-2028, potentially offering enhanced earnings visibility and strategic optionality in a volatile energy market. However, considerable uncertainties remain, including the final terms of any agreement, the allocation of risks associated with nuclear project delays and cost overruns, common in this sector, and the actual yield during the construction phase, although a 6% figure has been tentatively suggested. Notwithstanding these project-specific variables and a slight reduction in its 2025 earnings forecasts for Centrica—attributed to mild weather affecting British Gas, diminished storage earnings, and softer commodity prices—Jefferies maintains a 'buy' rating and a 180p price target. At this valuation, Centrica would trade at a 12x price-to-earnings ratio on 2026 earnings, offer a 4% dividend yield, and present an EV/EBITDA multiple of 5.4x, underscoring that while the Sizewell C deal is currently theoretical, its potential financial impact is a key element in the positive outlook for the stock.

Key Decisions for Investors

• Investors should consider the potential long-term value accretion from Centrica's involvement in the Sizewell C project, as highlighted by Jefferies' analysis, while acknowledging the current speculative nature and inherent project execution risks.
• Closely monitor upcoming announcements, particularly around July, for definitive terms of any Sizewell C agreement, focusing on Centrica's equity stake, capital commitment, risk mitigation strategies, and projected returns.
• Balance the long-term strategic growth potential offered by the nuclear investment against near-term earnings headwinds, reflected in revised 2025 forecasts, and evaluate the stock in light of Jefferies' maintained 180p price target and the associated valuation metrics.