Centrica PLC (LSE:CNA) shares have been caught up in a sector-wide sell-off following press reports of potential government action to delink power and gas pricing in the UK, but Citi argues the market has overreacted and reiterates its 'buy' rating on the stock.
The broker contends that investors are focusing too narrowly on earnings per share impact and failing to account for the limited remaining lifespan of Centrica's nuclear generation assets.
The bulk of Centrica's merchant nuclear capacity consists of older stations expected to close by the end of the decade, with Citi's own forecasts assuming all plants except Sizewell B are shut down by 2030.
Given that timeline, the broker argues the long-term earnings risk from any gas and power delinking policy is far smaller than the market's reaction implies.
Even under an aggressive scenario in which all merchant nuclear assets are written down to zero, ignoring the possibility that some capacity might transition to a regulated asset base model, Citi calculates the impact on its sum-of-the-parts valuation at approximately 3.5%.
The broker also notes that SSE and RWE, both of which have larger and longer-lived renewable and nuclear exposure, sold off alongside Centrica despite facing materially greater duration risk from any structural policy change.
In a European utilities sector that Citi describes as fully valued, the broker sees Centrica as offering superior risk/reward characteristics and views the current weakness as an enhanced buying opportunity.
No revised price target was included in the note.