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Centrica - flat underlying operating profits

William Ryder, Equity Analyst | 22 July 2021 | A A A
Centrica - flat underlying operating profits

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Centrica plc Ord 6,14/81p

Sell: 65.36 | Buy: 65.40 | Change 0.46 (0.71%)
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Centrica has reported a 6% increase in revenue from continuing operations to £8.2bn, while underlying operating profit fell 1% to £262m.

Centrica made a statutory profit of £1.4bn, reflecting exceptional items such as increased asset values and the contribution of discontinued operations.

The group's outlook for 2021 is broadly unchanged.

The shares were broadly flat following the announcement.

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Our view

British Gas owner Centrica has disappointed investors for a while now, but the group is working hard to turn itself around. This means an organisational restructure and the sale of non-core assets to streamline the business and shore up the balance sheet.

Centrica's sale of US based Direct Energy was warmly welcomed by the market. The price offered was 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 the former British Gas division making up about half of revenue and 63% of underlying operating profit last year.

The newly reorganised British Gas segments primarily supply gas and electricity to UK household customers and small businesses, 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 among employees.

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 longer term alongside the economy, but frankly it was loss making in 2019 too.

There are some signs energy demand is starting to recover and, now that Direct Energy has been sold, the balance sheet looks in good shape to us. 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: 9.8
  • 10 year average Price/Earnings ratio: 11.5
  • Prospective yield: 5.5%

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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Half year results

Centrica has reorganised its business segments (again). British Gas has been separated into British Gas Energy and British Gas Services and Solutions, and several smaller operations have been shuffled around. Prior comparison periods have been updated accordingly.

British Gas Energy made underlying operating profits of £172m, up 121% on last year. Management partly attributed the improvement to an unusually cold winter, which followed an unusually warm one. The division also enjoyed lower general and Covid costs, though these were partly offset by increased Energy Company Obligation costs and a 2% fall in residential customers. This division now includes 450,000 small business customers, which have a similar energy profile to households.

British Gas Services and Solutions' underlying operating profit fell 36% to £60m. This reflects a £50m reduction from Covid and industrial action, which increased costs because the group increased its use of third-party labour and had to refund customers when service levels dipped.

The Energy Marketing & Trading segment made an underlying operating loss of £40m, compared with a £111m profit last year. Management attributed this to legacy contract costs which more than offset a ''positive contribution from core trading and optimisation activities''.

Centrica Business Solutions made an underlying operating loss of £24m, down from a £67m loss last year. This reflects a small profit from business energy supply and continuing losses from New Energy Services.

Adjusted operating profits in Upstream rose from £19m to £75m as higher prices offset lower volumes. Spirit Energy and CSL did reasonably well, but nuclear power generation continued to lose money.

Operating profits at Bord Gáis Energy fell from £29m to £19m, largely due to a power outage at the Whitegate power station.

Centrica generated £524m in free cash from continuing operations, up 4% on last year. Net debt has fallen from £3.0bn at the end of 2020 to £93m, reflecting the sale proceeds from Direct Energy.

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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.