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Centrica - dividend reinstated after 2-year hiatus

Half year revenue, excluding the now sold Spirit business, rose 75% to £14.3bn.

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Half year revenue, excluding the now sold Spirit business, rose 75% to £14.3bn, thanks to higher wholesale prices which drove growth across all parts of the business.

Underlying operating profits increased sixfold to £857m ignoring the impact of the Spirit Energy sale. This was mainly due to a strong performance in Upstream and the impact of volatile commodity prices on the Marketing & Trading segment. However one-off losses related to the value of hedging contracts meant the group posted a net loss of £864m.

The group announced a 1.0p interim dividend after pausing pay outs for 2 years.

The group's expecting full year earnings per share to be at the top end of analyst forecasts of 10.1p-15.0p, providing commodity prices remain elevated.

The shares fell 3.4% following the announcement.

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Our view

With the Spirit sale complete, the British Gas owner is moving forward as a leaner organisation with more stable finances. We're seeing evidence of the fully fledged turnaround we've been hoping for and it's starting to yield results.

Centrica rid itself of its US Direct Energy business last year and Spirit Norway's been given the boot. The proceeds from these disposals substantially improved Centrica's balance sheet, giving management more room to manoeuvre through volatile conditions. Cost saving efforts were the real hero, though, ultimately driving profits higher.

The group's also benefiting from volatile commodity prices which has bolstered the bottom line in its energy trading business. That doesn't mean it's plain sailing, though. Evidence of weakness at British Gas was disappointing. The group's seen customers start to shift toward lower-priced service offerings to cope with rising inflation. They're also using price-comparison websites to find the cheapest suppliers, putting downward pressure on margins. Not to mention Centrica's struggled with staffing issues and workload buildup, leading to poor customer service which ultimately cost the group £25m. And that doesn't account for the 5% of customers who walked out the door.

Rising wholesale costs are another potential concern. The already volatile pricing has been made more uncertain by the escalating crisis in Ukraine. Centrica's hedge positions helped shelter it from industry-wide bankruptcies the last time prices surged, and the same should hopefully hold true if we have a repeat scenario. But the group's margins could be under pressure if price caps don't keep pace with inflationary headwinds.

The group's in a much better place to weather this storm than it was just a few years ago. The balance sheet looks much healthier, finally sporting a net cash position. That's allowed the group to reinstate dividend payments after a two-year hiatus. However no dividends are ever guaranteed.

Centrica's transformation has been successful thus far, and we're impressed by how far they've come. But there's still a long way to go and the future's been muddied by looming uncertainty. That's tempered the market's expectations, with a price to earnings ratio below their long-term average. This could be an attractive entry point for those willing to take on some risk, but with so much uncertainty we'd advise caution.

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 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.

Half Year Results (underlying)

British Gas Services & Solutions customer numbers fell 5%. Operating profits fell from £60m to £7m as the group was forced to pay compensation for disappointing service levels, and customers swapped to lower-cost service options.

Both retail and residential customer numbers grew at British Gas Energy. Operating profits declined 43.0% to £98m as costs per customer rose 3% reflecting money set aside for customer defaults. More customers than forecast were on tariffs that didn't reflect rising commodity prices, the impact of which is expected to be recovered in future periods.

Centrica Business Solutions swung from a £24m operating loss to profits of £20m, reflecting the return of normal demand patters in Business energy supply and narrowing losses at New Energy Services.

Bord Gais Energy customer numbers rose 1%. Operating profits increased 74% to £33m, reflecting last year's shutdown of Whitegate power station.

Energy Marketing & Trading posted operating profits of £278m, an improvement from last year's £40m loss. This reflected strong trading activities in gas, power and renewables, and profits from the remaining gas contract relating to the Sole Pit gas field, which runs until 2025.

Upstream operating profits jumped from £75m to £906m thanks to improved Nuclear volumes, higher average gas prices at CSL and what remains of Spirit Energy.

Free cash flow increased by £119m to £643m. This fed into a net cash position of £316m compared to net debt of £93m at the same time last year.

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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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 28th July 2022