Centrica (Buy, TP=290.0p) - Corporate news - Lower tax rate means slightly higher EPS (3p)

Centrica (Buy, TP=290.0p) - Corporate news - Lower tax rate means slightly higher EPS (3p)

Update

Centrica released its trading update this morning, showng good news in Downstream businesses (British Gas Residential, British Gas Business and British Gas Services). For Centrica Energy, oil & gas production suffered from lower spot prices and lower production volumes, while the Power Generation performed well. According to the press release, 2009 operating profit from the upstream business is going to be less than half of 2008 despite the four month contribution from Venture, but note “The reduction in profits from the highly taxed UK upstream business will reduce the Group's effective tax rate which is now expected to be around 36% for the full year." Centrica storage and Direct Energy are trading in line with full year expectations.

Impact
This puts a dent in our operating profit for 2009e, now £1,810m vs £1,826m previously, but also implies higher group net income before exceptional costs. Our 2009e EPS improves from 19.5p to 19.9p. Note though that “some one-off costs will be incurred for the integration of British Gas, with an exceptional charge of around £50m expected in 2009, and additional exceptional costs expected in 2010” according to the press release.

Target price & rating
We reiterate our Buy rating. Our unchanged 290p TP is based on a blend of SOTP (290p) and DCF (284p: 7.6% WACC, 12.9% norm. EBITDA margin, estimated CO2 price of €23/t in 2013e). Consensus currently stands @: Buy 67%, Hold 13% and Sell 20%. We expect the greater hedge position to firm up this positive stance on Centrica in the medium term.

Next events & catalysts
A decision from the European Commission on the sale of the 51% stake in Belgian business SPE to EDF is due imminently. Approval will allow the sale to complete, simultaneous with the acquisition by Centrica of a 20% stake in British Energy. If the deal goes ahead as we expect, Centrica's share price should move positively.