ii view: Centrica shares up 30% after raising billions from US exit

The sale of its US business is a huge boost for Centrica, which is in desperate need of good news.

Half-year results to 30 June 2020

• Selling North American business for $3.6 billion (£2.85 billion)
• Adjusted operating profit down 14% to £343 million
• No interim dividend payment
• Group net debt down 18% to £2.8 billion

Chief executive Chris O’Shea said:

"Centrica delivered a resilient performance against the unprecedented backdrop of the Covid-19 crisis during the first half of the year. That is due to the response of colleagues across the Group to keep our customers warm, safe and supplied with energy and services during the pandemic. I am truly grateful for their efforts. Our mission now is to turn around the Company by putting customers at the heart of everything we do and creating a simpler, leaner, more modern and more sustainable company. The sale of Direct Energy is a fundamental step towards this, and although we have a lot more to do, we have the people, the brands and the market positions to deliver a successful turnaround."

ii round-up:

British Gas brand owner Centrica (LSE:CNA) today announced the sale of its North American business for $3.6 billion (£2.85 billion) along with a 14% fall in adjusted operating profit to £343 million – impacted by both Covid-19 and lower commodity prices. 

Sale proceeds will be used to both reduce debt and bolster its staff pension schemes. It declared no interim dividend payment. 

Centrica shares rallied by more than 30% in early UK trading having fallen by more than 40% over the last year and 80% over the last five years. Electricity utility SSE (LSE:SSE) has seen its shares gain by around 13% over the last 12 months.

Having previously diversified both in business type and geographical terms, Centrica is now looking to reverse and become a simpler, leaner business.

In June, the energy provider announced the loss of around 5,000 jobs or a fifth of its workforce as it progressed its strategy under new CEO Chris O'Shea.  

The hunt for a buyer of its North Sea Spirit Energy exploration and production business is to recommence once commodity and financial markets settle. Brent crude is down over 30% year-to-date. The sale of its 20% stake in the UK’s nuclear energy fleet has been put on hold. 

Total customer numbers for the period including North America fell by 1% to just under 13 million. Group net debt as of the end of June stood at £2.8 billion, down 18% year-over-year. 

ii view:

Moves to progress its simplification strategy have today pleased investors. A sale price of $3.6 billion is comfortably above broker UBS’s valuation estimate. Both earnings per share and free cashflow also exceeded forecasts, with the broker summarising the first half as ‘surprisingly solid.’ But challenges remain, with the group’s rising staff pension deficit an ongoing issue. 

For investors, the speed of change at the company under the relatively new chief executive is reassuring. Cash to reduce group debt of £2.8 billion, a level equal to its current stock market value, is positive.  But the suspension of the dividend when other utilities such as SSE continue to pay, is a blow, while the Covid-19 backdrop heightens potential customer bad debts and makes a sale of Spirit Energy more challenging. Of course, there is still much to do at Centrica, but, encouragingly, top brass have demonstrated they can get things done.  

Positives

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

Negatives

• Offering no current full-year financial estimates
• Suspended dividend payment

The average rating of stock market analysts:

Strong hold