BUY CNA LN – Replugging – Short/Medium term upside +35%, blue skies +150-300%

– Has been a perennial disappointer. Worst performing utility in 2020 but is finally getting its act together.

– Having sold the US business the balance sheet is in much better shape, and the move in rates in the UK recently will help reduce the pension deficit that some of the proceeds will fund.

– A future sale of Spirit will provide more room to call some expensive debt early and create a meaningful earnings improvement from reduction of interest costs.

– Near term, recent commodity price moves are providing a near term tailwind with every 10% rise in oil/UK gas/UK power adding 18% to EPS.

– Strategy for the remainco will drive earnings and valuation going forward. Peer Homeserve provides an idea of what growth could look like with a coherent strategy. A significant fleet of engineers could help facilitate the transition from heat pumps to low carbon alternatives for example.

– The net result could easily see CNA making 7.5p of much more predictable EPS vs history with a de-geared balance sheet and mid-teens FCF yield in 2023. Even at pessimistic historic multiples discounted back there is plenty of upside.

Our DCF valuation comes in around 70p while we see a blue sky scenario valuation in case of turning its focus to a hybrid energy/renewable company being +75-150% based on a renewable peer valuation matrix