LONDON (ShareCast) - (Sharecast News) - Centrica faces major headwinds and will not pay a dividend in 2020, Jefferies said as the broker downgraded the struggling energy provider to 'hold' and slashed its price target.
Demand for energy from businesses will be lower than expected and Centrica's bad debts will be higher because of the Covid-19 lockdown, Jefferies said. It reduced its recommendation on the British Gas owner's shares to 'hold' from 'buy' and cut its share price target to 29p from 50p.

Jefferies reduced its estimate for Centrica's earnings per share for the second time since March, cutting another 30% off its forecast for 2020-2022. This brings the broker's total reduction for Centrica earnings to 55% since 11 March with about 70% of the downgrade caused by bad debts and 25% to lower demand.

Centrica's liquidity position is healthy but its balance sheet is precariously positioned, Jefferies analyst Ahmed Farman said. The company might be able to preserve its Baa2 credit rating but this looks risky, he said.

As a result, no dividend per share (DPS) is expected in 2020 and the 2p payout pencilled in by Jefferies for 2021 looks uncertain, Farman said. To build confidence around a dividend policy Centrica should reduce its balance sheet leverage by between £0.5bn and £1bn - or more in a "dowside scenario", he argued.

"Our extensive assessment of Centrica's historical working capital and bad debt trends suggest that material headwinds are ahead," Farman said "We also expect no DPS payment for FY20. Centrica may hang onto its Baa2 rating for now, but we see limited support for the rating under a more protracted crisis."

Centrica is under new management as it faces pressure on its finances from the Covid-19 crisis. The FTSE 100 company cancelled its dividend, cut capital spending and delayed the planned sale of its Spirit Energy business in early April to cushion the impact of rising bad debts and weak demand.

With the planned sales of Spirit and UK nuclear power plants looking unlikely, an alternative source of funds would be to sell Centrica's north American energy supply business Farman said.

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