Morningstar | CNA Sets FY EPS Target in Line With Our Estimate But Below Consensus; Excessive Share Price Reaction
We reaffirm our GBX 160 per share fair value estimate along with our no-moat, stable moat trend ratings after Centrica released its trading statement for the first four months of the second half reflecting a persistently challenging backdrop. Still, the company reiterated its dividend, cash flow, and net debt targets. Management set 2018 EPS guidance at GBX 11.5 per share, in line with our GBX 11 though below the consensus' GBX 13. We view the negative share price reaction as excessive.Churn accelerated in the second half albeit below our conservative assumption. U.K. Home energy supply lost 372,000 accounts since the beginning of the second half, accelerating from the 341,000 loss in the first half. Management cited a focus on value over volume, market switching and the August tariff hike. The 713,000 lost accounts year to date implies a 5.5% churn rate. Annualizing it points to a 6.7% rate, below our 9% assumption. Regarding the tariff price cap, Centrica indicates that the Ofgem's methodology revision for calculating procurement costs will drive a one-off negative impact on 2019 adjusted operating profit of around GBP 70 million. Incorporating it would reduce our 2019 net income estimate by 8%.
Upstream activities were hit by operational issues. In E&P, Centrica lowers the 2018 production outlook from 50/mmboe, in line with our estimate, to 47.5 mmboe on unplanned outages. The group indicated that 2019 production should be similar to 2018, roughly in line with our 46.9/mmboe estimate. Management lowered its 2018 nuclear output guidance by 0.2 TWh on unplanned outages.
In all, the impact of lower E&P and nuclear volumes in 2018 will be offset by churn lower than on our estimates, and we expect to leave our 2018 net income unchanged. The impact of the 2019 GBP 70 million one-off on the U.K. supply business will be mitigated by higher number of accounts on lower 2018 churn. These changes will not materially impact our long-term estimates and valuation.
Centrica is an energy and services company. Co.'s segment are: Energy Supply and Services, which supplies gas and electricity in the U.K. and North America; Connected Home, which supplies energy solutions and technologies to residential customers; Distributed Energy and Power, which supplies energy solutions, generation and technologies to commercial and industrial customers; Energy Marketing and Trading, which trades and optimizes energy; Exploration and Production, which produces and processes gas and oil and develops new fields; Central Power Generation, which generates power from combined cycle gas turbines, wind and nuclear assets; and Centrica Storage, gas storage in the U.K.
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