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Centrica - a dramatic end to the year as expected

Emilie Stevens, Equity Analyst | 13 February 2020 | A A A
Centrica - a dramatic end to the year as expected

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Centrica plc Ord 6,14/81p

Sell: 52.22 | Buy: 52.28 | Change 0.00 (0.00%)
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Full year underlying operating profits fell 35% to £901m, reflecting the impact of the UK's energy price cap, low wholesale gas prices and nuclear outages. The group's adjusted cash flow and net debt both finished within target ranges.

However, lower oil prices resulted in write-downs of oil & gas assets. Together with poor performance from nuclear power assets and increased restructuring charges that hit reported operating profits - which came in at a £849m loss.

A full year dividend of 5.0p was announced, down from 12p last year, in line with the group's dividend cut at the half year.

The shares fell 15.9% in early trading.

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Our view

Life as a utility is meant to be anything but eventful. Unfortunately Centrica seems to be an exception.

Profits have been pummelled, the dividend halved and the group's on the lookout for a new CEO. And after today's results there's nothing to suggest this saga is coming to an end anytime soon.

The Consumer and Business division continues to swim against the tide and Centrica is finding breaking up with its nuclear and E&P businesses harder than expected.

In theory the shift makes sense. Centrica's found out the hard way that the world of upstream oil production can be volatile, and Nuclear is a divisive and potentially expensive industry. Retail energy supply however is something it's been doing for a while. Through Direct Energy and British Gas the group has a wide customer base in the US and the UK. It's less capital intensive, so should be more cash generative and there are also opportunities for efficiency savings and cross-selling (such as the Hive smart products).

Unfortunately we're seeing that theory and practice are two different things.

Life in the Consumer business is far from simple. A price cap on UK energy bills has also served to cap profits. Thanks to the rise of price comparison websites and smaller challengers, Centrica's found its margins squeezed and customers harder to hold on to.

The Business division, home to energy trading and business energy supply, struggles to excite too. Returns in the trading business, although up this year as a whole, tend to be turbulent and warmer winters have meant there's no need for the heating to be on max. Customer numbers are stable while any green shoots from newer ventures like Business Solutions, which installs energy monitoring technology, are too small to move the dial just yet.

Amidst it all there are some rays of light though. UK customer losses have started to slow, most importantly so in the energy supply business. While non -core disposal plans should help debt come down eventually; the market expects to see debt fall to £1.6bn in 2022.

Centrica's series of unfortunate events is still very much playing out. So we'd err on the side of caution. For the intrepid, Centrica still offers an above market yield of 6%, even after more than halving the pay out this year. But with increases tied to both profits and cash in the future, a question hangs over room for growth.

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Full Year Results

Centrica Consumer saw underlying operating profits fall 33% to £505m. This reflects a £300m hit to revenue from the introduction of the UK's energy price cap at the beginning of 2019 and increased pricing pressures in energy supply, partially offset by cost savings over the year of £229m.

Customer numbers remained flat over the year at 12.5m. The US customer base rose 6% to just under 2.8m, offsetting a 2% decline in the UK where customers fell to 9.2m.

Centrica Business underlying operating profits nearly tripled to £217m. That reflects higher margins in North America and a good Europe trading performance. The division delivered £40m of cost efficiencies in the year.

Business customer numbers rose by 2% over the year to 512,000, as growth in the UK offset declines in the US - where the group is on higher value customers.

Upstream underlying operating profits fell 68% to £179m, with declines in both Exploration & Production and Nuclear. E&P profits fell 69% to £160m, largely due to lower gas prices in the UK, together with lower production volumes. Nuclear profits more than halved to £19m, with output hit by continued outages at the Dungeness B and Hunterston B nuclear power stations.

The planned exit from UK nuclear by the end of 2020 may be delayed as a result of the operational issues at Dungeness B and Hunterston B plants. The group expects to start receiving initial bids for its 69% interest in Spirit Energy over the first quarter of 2020. Three non-core businesses were sold in 2019, with proceeds expected to be around £350m over 2019 and 2020, with a further £150m of disposals to go.

Underlying operating cash flows fell 18% in the year to £1.8bn, with next year cash flows expected to be between £1.6-1.8bn - reflecting pressures from "very low" wholesale commodity prices. As anticipated, net debt rose from £2.7bn to £3.2bn, mainly reflecting changes to accounting rules. Net debt is expected to rise to £3.2bn-£3.6bn next year, before any proceeds from planned divestments.

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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.

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