Why Centrica shares just surged 9% to four-month high

This gas supplier and dog stock is repaying faith shown by loyal shareholders and bargain hunters.

After several profit warnings since 2017, today's in-line trading update from Centrica (LSE:CNA) was greeted by long-suffering investors along the lines that no news is good news.

Shares surged 9% to 79p as the reassuring statement boosted Centrica's chances of FTSE 100 survival ahead of next month's quarterly reshuffle. Having recently seen its shares slide to the lowest level since the company was created out of British Gas in 1997, Centrica was this morning the 99th biggest stock in the FTSE 350 index with a value of £4.6 billion.

Whether today's update is the start of a meaningful recovery remains to be seen. Analysts at Jefferies, who have a target price of 90p, called today a "first step forward".

While overall guidance given in July remains in place, Jefferies is encouraged by Centrica finding £150 million more of savings from capital expenditure and efficiencies. They said this implied a 10% upside to their free cash flow forecasts for 2019 of £1.1 billion.

This boost, however, comes too late to save the dividend after CEO Iain Conn announced in July that the pay-out would be rebased from 12p to 5p a share in February's annual results. The projected yield remains at a chunky 7%, compared with 14% prior to the cut.

Centrica is also promising a progressive dividend over time, but this still seems a long way off when there are so many variables in its current business mix. In today's statement, these included further extensions to outages at the Dungeness B and Hunterston B nuclear power stations and lower near-term European wholesale gas prices.

British Gas energy supply customers also continue to desert the company, although this update's 107,000-strong reduction in accounts was more than offset by growth in services and home solutions. The rate of energy supply losses is also much lower than in 2018, despite continued high levels of price competition and market switching.

Across the Centrica Consumer division, total customer account holdings increased by 214,000 in the four months to October and have increased by 528,000 in the first ten months of 2019.

As Centrica is also seeing higher margins and returns in North America business energy supply, the company said it saw no reason to change guidance from July's interim results.

Source: TradingView Past performance is not a guide to future performance

However, UBS said the absence of any estimate on earnings per share (EPS)  - apart from it being second half weighted - would allow "uncertainty to linger". The broker currently expects an EPS figure of 7p although adds that December weather could distort this by 1p either way.

Other negatives in the eyes of UBS were the absence of updates on a successor for Conn or on the potential sale of Centrica's 69% interest in exploration and production Spirit Energy by the end of 2020. Together with minority holdings in UK nuclear plants, Centrica is set to raise an estimated £2 billion through disposals, which will be used to cut debt.

This repositioning will give Centrica a clearer focus on its UK consumer businesses, as it looks to satisfy "the changing needs of our customers" through energy supply, services and home solutions.

Conn, who is staying with the company until its annual meeting next May, 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."

Overall, UBS said the absence of negative surprises - plus a few positives - would be well received.  They added:

"For Centrica, after recent surprises, we believe no news is good news".