Centrica lifts payouts on profit hike

The headline numbers for Centrica’s (CNA) half-year results suggest a turnaround of stunning magnitude, as a prior-year operating loss of £1.1bn was converted into a pre-tax profit of £6.4bn.

Yet in both years, the reported numbers were heavily influenced by the timing of increases in the energy price cap mechanism set by the government. Last year, it was locked into providing customers with gas at much lower rates, following the surge in prices after Russia invaded Ukraine.

Two hefty price caps later, though, and with gas prices sliding it made a one-off gain of £4.4bn. Feeling suitably flush, Centrica increased the scale of its buyback programme by £450mn to £1bn, and upped its half-year dividend by a third to 1.33p. 

Chief executive Chris O’Shea prefers to highlight the regularity of its cash flows. It generated £10bn in free cash over the past three and-a-half years – two-thirds of which was from regular operations and the rest from asset disposals as part of a turnaround programme. This is now largely complete and its goal has shifted to sustainable profit growth. 

Centrica set out a new “green-focused investment strategy” that involves spending £600mn-£800mn over each of the next five years, half of which will be on green assets. Even after this, it expects to make £800mn of adjusted operating profit a year and to maintain an average return on capital of 20 per cent. 

Centrica’s shares are up 73 per cent since we highlighted them as a buy idea in March last year, and at 10 times broker Investec’s forecast earnings look like less of a bargain than they were, but we think it operates from a position of unrivalled strength in the market. Maintain buy.

Last IC View: Buy, 16 Feb 2023