Centrica Plc Ord 6,14/81p (CNA)

Company overview

HL Comment (17 November 2011)

The group's third quarter update (17Nov2011) proved to be broadly cautious in tone. As a result of the unusually warm weather experienced in the UK in recent months, and the corresponding impact on consumption, management anticipate 2011 earnings which are marginally lower than current analyst forecasts. At its Residential supply business, higher wholesale gas costs had resulted in increased customer tariffs, with churn increasing following the rise. As a result, the number of customer accounts on supply stood at 15.9 million, slightly lower than at the start of the year. However, with the group’s operations having been widened over recent years, management noted good progress for its upstream gas and oil business, particularly for its development projects and in exploration.

Negative Points:

• Rising UK wholesale gas prices - +26% since last winter – are pressuring margins for its supply business, while unseasonal weather has hit consumption. Average residential gas consumption was 17% lower than for the same period in 2010 and average residential electricity consumption was 3% lower.
• The market for central heating installations remains difficult. Despite improved market share, the number of installations was 10% lower than in the same period during 2010.
• At its power generation business, gas-fired generation volumes for the first ten months of 2011 were 32% lower than for the same period in 2010.
• A review of group costs is expected to incur a number of associated one-off charges during the second half of the current financial year.
• Concerns regarding regulatory (Ofgem) changes remain a constant background worry. Ofgem's Retail Market Review suggests a number of potential market changes could be implemented.

Positive Points:

• Following the takeover of oil and gas production company Venture and an acquired interest in nuclear provider British Energy, management has attempted to improve the balance of the group's business operations.
• In light of the challenging commodity price and economic environment, management is now undertaking a review to identify cost savings across the group.
• At its residential services business, growth in the number of contract holdings continued to expand, with an increase of 59,000 in the ten months to the end of October seen.
• In exploration, oil was discovered at the Centrica operated Norwegian Butch prospect and further appraisal is now underway.
• In power generation, the group’s share of nuclear output for the first ten months of the year totalled 9.5TWh, 20% higher than the corresponding period last year, while wind load factors had also been higher on average than in 2010.
• Its North American business continued to make good progress. The board currently expects substantial year on year profit growth. It completed the acquisition of First Choice Power, a Texas energy supplier.
• The dividend policy continues to be progressive – the half year dividend payment for 2011 has been increased by 12pc over 2010.
• The group has on occasion been subject to takeover speculation.

Consensus:

On balance, market consensus indicates a strong hold.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.