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Centrica - earnings set for top end of analysts' forecasts

Centrica released a trading statement ahead of its Annual General Meeting, noting strong performance across the first five months of the year.

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Centrica released a trading statement ahead of its Annual General Meeting, noting strong performance across the first five months of the year.

In the retail division, first-half underlying operating profit is expected to come in "significantly higher" than previous years, driven by allowances in the UK domestic tariff cap having a positive impact on British Gas Energy.

Performance in Energy Marketing & Trading has remained strong. In Infrastructure, availability and volumes from gas production, nuclear and gas storage have helped to offset the impact of lower commodity prices.

Full-year underlying earnings per share (EPS) is now expected to be towards the top end of analyst forecasts of 16.5p-24.7p, heavily weighted towards the first half of the year.

The shares rose 1.8% 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 five months of the year, thanks to increased allowances in the UK domestic tariff cap. The majority of these tailwinds should be felt in the first half of the year, but are strong enough to nudge up full-year earnings per share guidance toward the top end of analysts' forecasts.

The Energy Marketing & Trading (EM&T) and Upstream divisions were the star money-makers last 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 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.

But it's not all good news.

The British Gas Services division is 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. Last we heard, 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 £2.0bn by the end of 2023. This has allowed the group to extend its 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. As volatility and energy prices fall, some of the recent tailwinds will likely come out of Centrica's sails.

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: 13th June 2023