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Centrica - buyback extended as profits jump

Centrica's revenues jumped 61% to £23.7bn.

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Centrica's revenues jumped 61% to £23.7bn. This was driven largely by the impact of higher gas and electricity prices as well as higher prices on retail tariffs. All business areas saw increases, with the important British Gas energy division seeing a 74.3% increase.

Excluding last year's sale of Spirit Energy, underlying operating profit rose from £392m to £2.8bn. The group's Energy Marketing & Trading, and Upstream divisions accounted for 96% of these profits as their strong production volumes benefitted from high energy prices.

Underlying net cash increased from £680m to £1.2bn. Underlying free cash flow rose from £1.2bn to £2.5bn.

Looking to 2023, the group called out weather, commodity prices and the economic backdrop as factors outside its control that could impact performance.

The existing £250m share buyback programme is expected to be completed by May 2023, and the group plans to extend this by a further £300m. A final dividend of 2p per share has been proposed giving a full year dividend of 3p per share, compared to 0p last year.

The shares rose 4.1% 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 sale of assets like the Spirit Energy transaction in May 2022 have brought in significant amounts of cash, helping to strengthen the balance sheet and simplify the group's portfolio. That's helped financial performance in 2022, against a backdrop of elevated and volatile commodity prices.

The Energy Marketing & Trading (EM&T) and Upstream divisions were the star money-makers. 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 have enjoyed bumper performances, 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.

In the Retail business, it's a different story.

In the aftermath of many smaller energy suppliers collapsing, around 725k new customers were transferred to British Gas Energy (BGE). But while a gain in market share and higher revenues usually help the bottom line, profits actually fell as BGE provided £50m worth of additional support to struggling customers. This is a situation that's unlikely to resolve itself overnight.

The British Gas Services division is also in a sticky spot. It's under investigation by regulator, Ofgem, after allegations that third-party contractors, employed by Centrica, carried out forced installations of pre-pay meters in vulnerable clients' homes. In an attempt to improve its service levels, the group recruited more than 800 engineers in 2022. While this has noticeably improved operations, reflected in the number of rescheduled appointments falling from 11% to 6%, there's still plenty of room for improvement. Especially if the group wants to restore its reputation and hold onto market share.

In terms of balance sheet, Centrica's in a healthy position now. Underlying net cash currently stands at £1.2bn, equivalent to roughly 20% of the group's market cap. And this cash pile is expected to grow further, to a mammoth £2.2bn by the end of 2023. This has allowed the group to extend its current buyback programme, and means the recently reinstated dividend is on solid ground for now. 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. With cash piles expected to increase, the group now has a sizable cushion for any future bumps in the road. But that doesn't negate the challenges ahead. If volatility and energy prices fall, some of the recent headwinds will likely come out of Centrica's sails, and the retail business is in a difficult spot. That's reflected by a valuation that's well below the long-term average.

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: 16th February 2023