In recent years, Government initiatives to increase competition in the energy supply market have led to a rise in the number of customers switching providers. Meanwhile, the regulation has become tougher against a backdrop of growing public dissatisfaction with the “big six” energy suppliers. Indeed, after much procrastination a standard variable tariff (SVT) price cap was introduced last year. These factors means we think it's unlikely we'll see a let up in in the dire performance of recent years from Centrica (CNA), owner of British Gas.
- Slight margin improvements
- Efficiency programme
- Dividend cut likely
- History of decline
- Hostile regulatory environment
- Continued customer losses
Centrica is very reliant on household supply with its consumer division accounting for 61 per cent of last year's gross profit. Consequently, it has suffered more due to customer losses than rival SSE (SSE). While customer losses are slowing (consumer division losses dropped from 1.4m to 249,000 last year) the company still missed EPS estimates and brokers are currently busy penciling downgrades off the back of the company's 2018 full year announcement. These downgrades are not yet fully reflected in our table below but will continue the torrid run of downgrades experienced by the company over the last five years: a pattern that has been mimicked by Centrica's share price.
While Centrica also operates a business division (23 per cent of gross profit) and an exploration and production arm (16 per cent), management has said it believes the customer-facing businesses offers the most growth potential, as energy markets change due to the trends towards decentralisation, increased customer choice and digitalisation.
Management has been stressing a focus on “customer value” to increase profitability and counteract customer losses. It has created a range of bundles and services such as online-only accounts or tariffs aimed at owners of electric vehicles. These efforts have had some success, and the group saw its adjusted operating margin expand roughly 23 basis points to 4.7 per cent in the last year. The company is also having some success with its cost cutting programme with £940m in cumulative savings since 2015. Meanwhile the group is looking to shore up the business with £500m of planned disposals, which includes the recently announced sale of its home services business Clockwork Inc for $300m (£230m).
However, this strategy does not look to be paying off overall. A tough commodity pricing environment as well as the continued regulatory pressure means we see limited scope for reversal of fortune any time soon. And a recent increase in the SVT cap could encourage a renewed uptick in customer defections.
It also looks increasingly likely that the dividend, which has been held flat at 12p since 2015, will need to be cut. Earnings cover, which 12 years ago stood at over 2 times, has now fallen below 1.
While the consumer division is the main source of concern, Centrica business division has also not been trouble free. The division reported a 25 per cent drop in operating profits last year following increased losses in the distributed energy and power business, as well as profits from energy marketing and trading dropping to almost half of 2017’s level.
| CENTRICA (CNA) | ||||
| ORD PRICE: | 119p | MARKET VALUE: | £ 6.78bn | |
| TOUCH: | 119.2-119.3p | 12M HIGH / LOW: | 165p | 119p |
| FORWARD DIVIDEND YIELD: | 7.5% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 55p* | NET DEBT: | 67% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
| 2016 | 27.1 | 2.19 | 16.8 | 12.0 |
| 2017 (restated) | 28.0 | 0.14 | 12.5 | 12.0 |
| 2018 | 29.7 | 0.58 | 11.2 | 12.0 |
| 2019** | 27.3 | 1.13 | 10.8 | 8.0 |
| 2020** | 27.0 | 1.18 | 11.9 | 8.9 |
| % change | -1 | +4 | +10 | +11 |
| NMS: | 10,000 | |||
| BETA: | 0.43 | |||
| *Includes intangible assets of £4.46bn, or 78p a share **Estimates RBC Capital Markets, adjusted profit and EPS figures | ||||
