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Centrica - Weak results, but shares rise

George Salmon | 22 February 2018 | A A A
Centrica - Weak results, but shares rise

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Centrica plc Ord 6,14/81p

Sell: 79.70 | Buy: 79.80 | Change 1.88 (2.42%)
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2017 group revenue rose 3% to £28bn, however adjusted operating profits fell 17% to £1.25bn as profitability in Centrica's business to business division collapsed. However, this was broadly in line with expectations following the profit warning in November.

The group confirmed its intention to hold the full year dividend steady at 12p per share this year and out to 2020, and details of new cost saving plans.

The shares rose 3.6% on the news.

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Our View

Centrica is in the midst of a turnaround. We can see the attractions of where it's trying to get to, but the journey's proving far from smooth.

Between 2007 and 2014, Centrica invested billions in upstream exploration and production (E&P) assets, leaving it very exposed when the oil cycle turned. The net result was a 30% dividend cut, and a share placing to shore up the balance sheet.

The group is now shifting focus away from the potentially volatile world of E&P. Costs are being slashed and capital investment is set be significantly lower. The focus is instead on its cash generative downstream businesses in the US and the UK, namely Direct Energy and British Gas.

The group has around 25m existing customers as well as strong, recognisable brands. If it can play to these strengths, through cross-selling additional services (such as the Hive smart thermostats) and improve efficiency, it should be capable of growth.

Early progress on the transformation was reasonable. However, with 2016's dilutive share placing still lingering in the memory and political pressure for changes in the energy sector growing, many investors remained jittery.

In that context, a November trading update confirming weakness in Centrica's business-to-business division was particularly unwelcome. Both areas Centrica is looking to focus on are evidently under pressure.

By pointing out that cash generation is still heading in the right direction, and debt reduction is on track, Centrica is clearly trying to steer investors away from any thoughts of a dividend cut.

However, in the current climate a prospective yield as high as 8.5% tells us the market thinks the future of the dividend is uncertain at best.

Still lower capital expenditure, the planned sale of its stake in nuclear power assets and a further £500m of cost savings will help keep the wolf from the door, but cuts and sales can't continue forever.

Longer-term, underlying improvements in the energy supply businesses are required.

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Full year results:

In the Consumer business, total UK energy and services customer accounts fell by 1.4m to 20.3m. However, this includes the roll-off of 967,000 low-margin collective switch and white-label fixed price tariffs. Together with warmer than usual weather, this led revenues down 8% to £8.5bn, but cost savings and operational improvements in customer servicing ensured operating profits rose 1% to £819m. In Ireland profits rose 2% to £47m

It was a similar story in the US, with adjusted operating profit up 28% to £119m despite a 9% reduction in customer accounts, which dropped to 3.4m. The group has now entered into a number of retail partnerships that will expand the number of sales channels.

Centrica Business saw profit margins in both the UK and US fall significantly, with competitive pressures and warmer weather cited among the reasoning. This saw profits come in broadly in line with revised guidance, down 92% to £4m in the UK and down 68% to £71m in the US.

In Exploration & Production, the group completed asset sales in Trinidad and Tobago and Canada, and while adjusted operating profits dipped 2% to £184m, the group recorded pre-tax exceptional impairments of £494m after reducing forecasts on some fields and reevaluating decommissioning costs.

Profits in the Energy Marketing & Trading division fell 35% to £104m, and Distributed Energy & Power remains in the red, with an adjusted operating loss of £53m compared to £26m last year. Storage made an adjusted operating profit of £17m.

Adjusted operating cash flow was £2.1bn, while net debt fell £877m to £2.6bn. Both figures are in line with prior guidance.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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