ii view: Centrica profit to exceed forecasts

Shares for this leading UK energy supplier have plunged, but is it time to buy?

Second half trading update

• Full-year earnings per share to exceed current consensus forecast
• Net debt to stay flat at £2.8 billion

ii round-up:

British Gas owner Centrica (LSE:CNA) today reported broadly favourable second-half trading, although offered a cautious 2021 outlook given the continued overhang of the pandemic. 

Customer numbers for both its UK energy supply and boiler services businesses had remained stable at 6.9 million and 3.6 million each. Business electricity demand and residential boiler installation demand also both improved from the first half, as Covid restrictions were loosened, although remained down around 15% year-over-year. 

Centrica shares rose by 2% in UK trading, leaving them down just under 45% over the last year. Rival utility SSE (LSE:SSE) has seen its shares gain by around 5% over the last 12 months.

Full-year Centrica earnings are now expected to exceed current analyst forecasts – adjusting for the previously announced sale of its North America business – with net debt unchanged at £2.8 billion rather than the increase from the interim results previously expected. 

Having previously diversified both in business type and geographical terms, Centrica is now reversing as it seeks to become a simpler, leaner business. Just days ago, it completed the $3.6 billion (£2.7 billion) sale of its North American Direct Energy supply business. 

Under relatively new chief executive Chris O'Shea, the company is also executing a major restructuring programme involving the loss of around 5,000 jobs or a fifth of its workforce. 

Proceeds of the £2.7 billion Direct Energy disposal will be used to both reduce debt and contribute to its staff pension schemes.

However, accompany management outlook comments flagged renewed UK and Irish lockdowns, which are expected to continue pressuring both business energy and business services boiler demand.

Full-year results are scheduled for 25 February. 

ii view:

Along with its gas supply operations, Centrica is the biggest electricity supplier in the UK. It has a market share of around a fifth. Under its strategy to simplify, it also plans to sell its upstream oil and gas business Spirit Energy. It is currently pursing targets to reduce the emissions of its customers and its own operations and has made a commitment to be net zero by 2050. 

For investors, ongoing change at the company is encouraging and the sale of Direct Energy leaves it more focused. Proceeds are being used to both tackle its staff pension deficit and reduce net debt of £2.8 billion – a level broadly equal to its current stock market value. Strike action by British Gas engineers and call centre workers is a worry, though, and the omission of its 2020 interim dividend remains a blow, especially as other utilities such as SSE continued to pay.

The Covid clouded outlook can also not be ignored, potentially hindering demand and raising customer bad debts. In all, and despite progress, Centrica still has work to do to attract investors back.

Positives

• North American sale will reduce debt
• Progress to simplify the company is being made

Negatives

• Subject to commodity price movements
• No 2020 interim dividend payment

The average rating of stock market analysts:

Strong hold