Proactive Investors - Investment bank Liberum has issued a 'sell' recommendation on Centrica PLC (LON:CNA), the parent company of British Gas, suggesting that the recent surge in the company's share price has been 'overdone'.
In the year-to-date, the stock is up 75%, giving a valuation that reflects an overly optimistic assessment of the company's long-term cash returns and investment plans.
Liberum points out that as commodity markets return to normal, Centrica is likely to face increased pressure on its profit margins.
Additionally, the bank forecasts a declining earnings per share (EPS) profile for the company, with a negative compound annual growth rate (CAGR) of 32% from 2023 to 2027. In simpler terms, Liberum expects Centrica's profits to shrink over the next few years.
It is also not a fan of Centrica's capital allocation policy, which seems to prioritise short-term shareholder rewards over long-term business investments.
While the energy company has a green-focused investment strategy, allocating between £600 million and £800 million per year until fiscal year 2028, Liberum questions the transparency of these plans.
Liberum's target price for the shares is 150p - a modest discount to the 152p it is trading at on Monday.