ii view: cost cuts counter Covid headwinds at Centrica

An uncertain outlook leaves management unable to offer earnings estimates. Buy, sell or hold?

AGM trading update

Chief executive Chris O'Shea said:

"As expected, trading conditions have remained tough in the year to date. However, the modernisation of our Group remains on track and the difficult, but necessary process to move colleagues onto new terms and conditions is now complete. 

“Although the external environment remains uncertain, our tight focus on cash and on fixing the basics across the Group leaves us well placed as we continue the turnaround of our company."

ii round-up:

British Gas owner Centrica (LSE:CNA) still see headwinds from the pandemic countering its own management actions during this latest first-quarter trading period. 

A 15% reduction in UK business customer electricity demand, and an 11% downturn in boiler installations during the pandemic, sit against an ongoing expectation for a £100 million cut in operating costs during 2021. The company remains unable to offer any specific earnings or cashflow estimates for the year ahead given the degree of outlook uncertainty. 

Centrica shares drifted over 1% lower in UK trading, having gained by more than 40% since pandemic induced lows in March 2020. Centrica’s home boiler installation and servicing business has been hindered as customers looked to reduce house visits under Covid, with many of its shop outlet business customers closed during lockdown in the early months of 2021.

More favourably, nearly all of its staff have now accepted new work contracts, minimising potential strike action, while group net debt has fallen to £0.5 billion from £3 billion at the start of the year, aided by proceeds from the sale of its Direct Energy business.  

First-half results are scheduled for 22 July. 

ii view:

Centrica is the UK's biggest electricity supplier with market share of around a fifth. Under its strategy to simplify, it plans to sell its upstream oil and gas business Spirit Energy and its 20% stake in EDF's nuclear plants in the UK. Its climate change ambition is to become net zero by 2045 and help its customers be net zero by 2050. An update on its long-term strategy is expected in the second half of 2021. 

For investors, a suspension of dividend payments contrasts with ongoing payments at other utility companies such as SSE (LSE:SSE). The Covid clouded outlook and inability to offer any earnings guidance also cannot be overlooked. But the group’s modernisation programme continues with tough staff issues faced. Both debt and its staff pension scheme deficit have been reduced, while a further simplification of the company beckons as it considers both oil & gas and nuclear interests. In all, and despite still clear headwinds, the balance of risk reward may just about be swinging in favour of the latter. 

Positives

• North American business sale has reduced debt
• Progress to simplify the company ongoing

Negatives

• Subject to commodity price movements
• Dividend payment halted

The average rating of stock market analysts:

Buy