ii view: Centrica shares keep rising as savings identified

Despite political uncertainty, British Gas owner Centrica finally has some good news for shareholders.

Trading statement ahead of full-year results

• Full-year cash flow and earnings outlook unchanged
• Year-end net debt to be within the targeted £3-£3.5 billion range
• Expects capital investment of around £800 million, a reduction of £100 million
• In-year efficiency savings of around £300 million, up £50 million from previous target
• Full-year 2019 dividend payment totalling 5p per share - down from 12p in 2018

Chief executive Iain Conn (who steps down next year) said:

"Our performance has been solid so far in the second half of the year and we remain on track to achieve our full year targets for both adjusted operating cash flow and net debt. I am encouraged by further growth in customer accounts and the recovery of business energy supply margins in North America, while we also continue to drive material levels of efficiency and maintain capital discipline. Our focus remains on satisfying the changing needs of our customers, providing energy supply and its optimisation, and services and solutions to enable the transition to a lower carbon future."

ii round-up:

Centrica (LSE:CNA) is a diversified utility and energy company with operations largely in the UK, Ireland and North America. It supplies energy and services to over 25 million customers, mainly through its British Gas brand. 

It operates through the three divisions of Consumer, Business and Exploration and Production (E&P), although previously announced plans to exit oil and gas E&P and nuclear power generation.

For a round-up of this latest trading update, please click here.

ii view:

Centrica is attempting to simplify and shift itself back towards the customer. It previously announced plans to exit both oil and gas exploration & production and nuclear power generation. Proceeds from both will be used to fund restructuring costs and underpin the balance sheet. In the face of tough trading and a government move to introduce a consumer price cap, management also previously decided to cut the dividend payment. 

This latest update outlined trading which had remained in line with management’s expectations as of its late July half-year results. Most favourably, the company has found £150 million more of savings from both capital expenditure reductions and increased efficiencies. 

For investors, a prospective dividend yield of over 5.5% (not guaranteed) still provides attraction in today’s ultra-low interest rate environment. A change of the chief executive also offers opportunity for further change and improvement, and there's clearly renewed interest in the shares after this update. But, with the government’s energy price cap now in place, and potential for the company to be nationalised under a new Labour government – at an unknown price – investors should proceed with caution. 

Positives

• Targeting £1 billion of cost savings between 2019 and 2022
• A new chief executive may have a galvanising effect and provide renewed clarity of purpose
• Looking towards a progressive dividend policy over time

Negatives

• Group net debt rose by 17% to £3.37 billion as of the interim results
• The move to sell its E&P business leaves its less diversified
• Could be nationalised under a Labour government at an unknown price

The average rating of stock market analysts:

Hold