ii view: British Gas owner Centrica fires up earnings hopes

This diverse energy play has comfortably outperformed the FTSE 100 index over the last year. Buy, sell, or hold?

Trading update for five months to the end of May

ii round-up:

Energy supplier and owner of gas and oil production assets Centrica (LSE:CNA) today flagged its expectation for current full-year profit to come in at the upper end of analyst forecasts given strong overall group trading. 

A lack of repeat costs at its retail British Gas supply business - in relation to the domestic default tariff cap - is expected to prove a key driver in full-year earnings per share coming in at the upper end of the City’s 16.5p to 24.7p forecast range.  

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The FTSE 100 company's share price rose marginally, with the news following similarly positive updates from rivals Iberdrola and owner of Octopus Energy owner Origin. Centrica shares are up around 50% over the last year compared to an 8% gain for green and traditional power generator SSE (LSE:SSE). The FTSE 100 index itself is up around 5% over the last year. 

Trading at Centrica’s Energy Marketing & Trading (EMT) division also proved strong year-to-date. EMT trades in gas products including liquefied natural gas, often connecting suppliers in the wholesale markets.

Elsewhere, availability and volumes for its gas production, nuclear and gas storage businesses had been good, helping to offset lower wholesale commodity prices.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

First-half results to the end of June are scheduled for the 27 July. 

ii view:

Centrica supplies domestic and business customers with energy in both the UK via its British Gas business, and in Republic of Ireland through Bord Gáis Energy. Alongside its EMT division, its upstream business owns gas and oil exploration and production assets, including a 20% interest in the operational UK nuclear power generation fleet. 

For investors, unpredictable weather can cause uncertainty over customer energy demand at its supply business, and costs generally for businesses remain elevated. A price-to-net asset value above the three-year average may also suggest the shares are not obviously cheap, while gas and oil prices for its upstream business remain highly volatile, going from lows during the global pandemic to highs just after Russia’s invasion of Ukraine. 

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On the upside, its diversity of businesses often allows challenges in one area to be countered by strength elsewhere, and strong cashflows during its last financial year pushed net debt in previous years into net cash. Centrica has restarted dividend payments and now offers a forecast dividend yield of around 3%, while management previously flagged its assessment of opportunities to invest in energy transition through battery storage, solar farms, and carbon capture.

On balance, and with the consensus analyst estimate of fair value standing at over 135p per share, scope for longer-term optimism looks to persist. 

Positives

• A diversity of businesses
• Back paying a dividend

Negatives

• Subject to government scrutiny 
• Uncertain economic outlook

The average rating of stock market analysts:

Buy