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Centrica is stabilising but has a long road to recovery

It has wiped out its debt and will now be hoping it can start adding some new customers.
Centrica is stabilising but has a long road to recovery
  • Adjusted operating profit was flat for the year.
  • Higher demand for gas during cold winter offset by Covid-19 and industrial actions.

Centrica (CAN) is continuing its slow and painful rebuild. Its balance sheet looks a bit healthier now with net debt down to £0.1bn from £3.0bn in H1 2020 thanks to the £2.3bn generated from the sale of Direct Energy. The removal of the interest payment drag should ease some burden but the loss of over 144,000 customers proves there is still a lot of work to do.

The British Gas portion of the business benefited from an unseasonably cold spring and despite losing customers it managed to increase adjusted operating profit by 121 per cent to £172m.  The upstream business - including Spirit Energy, which Centrica is looking to sell - also benefited from rising commodity prices. However, profit growth in these areas was offset by a combination of Covid-19 and a workers’ strike, which generated an estimated combined cost of £87m. Adjusted operating across the group was flat at £262m. 

The business can’t rely on unseasonably cold winters forever especially given that global warming could conceivably increase temperatures over the long run. For long term growth, it needs to start increasing its customer base and cannot afford to lose another 144,000 next year. It said that the loss of customers this year was due to an increase in default price cap tariffs. In addition, the price comparison website market remained competitive, with some of its competitors pricing at negative gross margins.

To compete in the long run it must find a way to compete on pricing whilst also delivering a high quality of customer service. It is putting a lot of faith in its ‘software as a service’ IT platform which it hopes will be able to provide better service at a lower cost. It now has over 250,000 customers on this platform compared to 100,000 at the start of the year. This increase will have been part of the reason for British Gas lowering its annualised cost per customer by £7 to £95. These are promising numbers but not yet transformative.

Consensus estimates compiled by FactSet provides adjusted EPS of 3.45p, rising to 6.47p in the following year

It has been struggling to find a buyer for Spirit Energy but the fact that its operating profit was up to £104m from £34m raises the prospect of it getting a decent valuation. The shares have lost 80 per cent of their value over the past five years, but the recent restructuring efforts could potentially stop the rot. Hold.

Last IC view: Sell, 50.5p, 25 February 2021

CENTRICA (CNA)    
ORD PRICE:49pMARKET VALUE:£ 2.87bn
TOUCH:48-49p12-MONTH HIGH:59pLOW: 36p
DIVIDEND YIELD:NILPE RATIO:3
NET ASSET VALUE:42p*NET DEBT:13%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20206.33-462-5.90nil
20216.9290712.8nil
% change+9---
Ex-div:N/A   
Payment:N/A   
*Includes intangible assets of £1.9bn or 33p a share.