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Centrica - 98% of staff accept new contract

William Ryder, Equity Analyst | 10 May 2021 | A A A
Centrica - 98% of staff accept new contract

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Centrica plc Ord 6,14/81p

Sell: 83.50 | Buy: 83.62 | Change -2.24 (-2.60%)
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In a trading update ahead of its AGM, Centrica has confirmed 98% of UK staff have accepted new contracts as part of the group's restructuring efforts. As a result, Centrica continues to expect over £100m in cost savings in 2021.

UK business electricity demand was down 15% in the first quarter and residential boiler installations were down 11%.

Bord Gáis Energy's Whitegate power station is expected to return to service towards the end of this year.

Net debt at the end of the first quarter was down to £0.5bn from £3.0bn after the sale of Direct Energy.

More detailed information will be available when the group releases interim results on 22 July.

The shares fell 1.6% following the announcement.

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Our view

Centrica's sale of US based Direct Energy was warmly welcomed by the market. The price offered is a significant premium to the business's book value and the sale is a big step in the group's restructuring and reorganisation plans to become a ''simpler, leaner business''.

The proceeds have substantially improved Centrica's balance sheet. That gives management more options going forward and also takes the pressure off the drawn-out sale of the group's E&P and nuclear businesses. Centrica has recently shuffled its reporting segments around, with British Gas, now the largest division, making up about half of revenue and 63% of underlying operating profit last year.

The segment primarily supplies gas and electricity to UK customers, but also installs appliances like boilers. It should be a fairly reliable and cash generative business, but an energy price cap in the UK has also served to cap profits. And the rise of price comparison websites and smaller challengers means Centrica's found its margins squeezed and customers harder to hold on to.

The restructuring plan has also involved a controversial ''fire and rehire'' scheme. Management seems to have successfully imposed the new contract, and any reputational damage may not be a big problem for a regulated monopoly. But still, Centrica has copped some bad press and raised the ire of politicians, and management may have their work cut out to restore morale.

The other divisions are smaller, but include Bord Gáis Energy in Ireland, an energy trading business, gas & oil production (Upstream) and Centrica Business solutions, which provides gas and electricity to UK business customers.

The Business segment has had a particularly torrid time recently. Businesses have struggled during the pandemic, and there's little point keeping the lights and heating on in your shop when customers aren't allowed in. We expect this segment to recover alongside the economy, but frankly it was loss making in 2019 too.

There are signs energy demand is starting to recover and, now that Direct Energy has been sold, the balance sheet is in good shape. Recent restructuring efforts are important steps in the right direction but there's still a long way to go. Until Centrica's situation becomes clearer, we think it will struggle to deliver the 'steady Eddy' performance you might expect from a utility.

Centrica key facts

  • Price/Earnings ratio: 12.7
  • 10 year average Price/Earnings ratio: 11.5
  • Prospective yield: 4.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

Centrica's full year underlying operating profit from continuing operations fell 31% to £447m. However, the group recognised exceptional items of £1.6bn, leading to a statutory operating loss of £362m.

Centrica has completed the sale of its American business, Direct Energy, realising net proceeds of £2.7bn. The money will go towards paying down debt and the pension deficit.

The group is not declaring a dividend and will resume the payout "when it is prudent to do so".

Group revenue from continuing operations fell 6% to £14.9bn, reflecting declines in all business segments except Upstream.

British Gas made underlying operating profits of £281m, down from £304m last year. £201m of this was generated by British Gas Services & Solutions, while British Gas Energy made operating profits £80m, down from £124m last year due to warmer weather, the pandemic, offset by some non-recurring costs in 2019.

Underlying operating profits in the Energy Marketing & Trading segment rose 26% to £174m. This was thanks to a strong Liquid Natural Gas performance and lower management bonuses due to COVID.

Centrica Business Solutions made an underlying operating loss of £140m compared with a £20m loss last year. This primarily reflects lower business demand because of the pandemic.

Upstream operating profits almost halved to £90m, reflecting a weaker performance from CSL and Nuclear. Spirit Energy made operating profits of £84m, down from £90m last year thanks to lower realised prices.

Operating profits at Bord Gáis Energy fell 16% to £42m, reflecting the impact of COVID on business demand and bad debts.

Centrica generated £685m in free cash from continuing operations, up 45% on last year primarily reflecting a sharp fall in investment. This helped net debt fall from £3.2bn to £2.8bn over the course of the year, before including the Direct Energy sale proceeds.

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This article is original HL content, published by HL. 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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