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Centrica - British Gas Energy fuels strong performance

Centrica's first-half revenue rose 60% to £16.5bn, due to higher energy prices...

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Centrica's first-half revenue rose 60% to £16.5bn, due to higher energy prices.

Helped by a strong performance from the British Gas Energy division, underlying operating profit was £2.1bn compared to £857m last year, excluding the sale of Spirit Energy assets.

Free cash flow more than doubled to £1.4bn, thanks to the increased profits. The underlying net cash position rose from £1.2bn to £3.1bn in the six months to June 30.

Most of the tailwinds have been felt already due to the impact of the price cap and seasonality, so Centrica expects lower underlying profits in the second half.

An interim dividend of 1.33p per share has been proposed, up 33%.

The existing share buyback program has been extended by £450m to £1.0bn, and is set to be completed over the next 12 months.

The shares rose 4.5% following the announcement.

View the latest Centrica share price and how to deal

Our view

British Gas owner Centrica's turnaround is well advanced.

The British Gas Energy (BGE) division has helped to fuel a strong performance across the first half of the year, thanks to increased allowances in the UK price cap. This allowed a significant one-off recovery of costs from prior periods, providing a boost of around £500m to underlying operating profits. The majority of these tailwinds should have been felt by now, and over the medium term, profits in this division are expected to moderate to around £150-250m per year.

The Energy Marketing & Trading (EM&T) remains a star money-maker for now, bringing in £384m in the half year. The EM&T division is the trading arm of Centrica, which can benefit from energy price volatility. It also buys and stores gas when prices are low, then waits for higher prices to generate and sell power back to the market, profiting on the difference.

The Upstream division is responsible for the production of oil as well as the sale of power from its UK nuclear plants. Both divisions enjoyed bumper underlying performances in the first half, selling greater volumes against a backdrop of high prices. Bear in mind though, that the forces driving the current outperformance in the EM&T and Upstream divisions are cyclical, and can't be relied on forever.

But it's not all good news.

The British Gas Services division has been in a sticky spot in recent years, plagued by scandals and poor customer service levels. Customer numbers fell by 226,000, or 7%, in the first half as cost-of-living pressures drive customers to search providers for the cheapest deals. While it's too early to tell, there are some early signs that fortunes could be about to turn. Margins here are heading in the right direction and the division's returned to a slim profit.

Recent bumper profits have helped further shore up the balance sheet. With underlying net cash of £3.0bn, equivalent to around 40% of the group's market value, the recently reinstated dividend and extended buyback programme looks to be on solid ground.. But remember, dividends can vary and are never guaranteed.

We're extremely impressed with how far Centrica's come in the past of couple years. The group now has a sizable cushion for any future bumps in the road. But as volatility and energy prices fall, some of the recent tailwinds will likely come out of Centrica's sails, and profit growth will likely moderate.

Centrica key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 27th July 2023