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Centrica - restructure helps profits rise

Full year revenue rose from £12.3bn to £14.7bn, reflecting growth across all geographies except Norway.

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Full year revenue rose from £12.3bn to £14.7bn, reflecting growth across all geographies except Norway.

Underlying operating profits more than doubled to £948m, due to higher commodity prices, cost savings and more normal conditions following the pandemic. This was partially offset by disappointing results from British Gas Services, the Whitegate CCGT power station outage and lower Energy Marketing & Trading.

Management said its outlook for 2022 was ''broadly positive' but noted that volatile oil and gas prices and regulatory challenges made it difficult to offer a specific forecast.

The shares were down 3.5% following the announcement.

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Our view

Full year results from the British Gas owner revealed a new leaner organisational structure and more stable finances. We're seeing evidence of the fully fledged turnaround we've been hoping for.

Centrica rid itself of its US Direct Energy business last year and Spirit Norway will get the boot this year. 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. If these can be maintained moving forward, we'd expect to see profits continuing to climb as usage rates recover following the pandemic.

However, now that pandemic headwinds are receding, new concerns are starting to crop up. 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.

We're also concerned about rising wholesale costs. The already volatile pricing has been made more uncertain by the escalating crisis in Ukraine. Centrica's hedge positions protected it from industry-wide bankruptcies the last time prices surged, and the same should hold true if we have a repeat scenario. But a sharp increase would eat into the hard-fought margin improvements.

The group's in a much better place to weather this storm than it was at the start of the pandemic thanks to the streamlined operations. The balance sheet looks much healthier, finally sporting a net cash position. Dividends are still off the table, but a marked improvement in cash flow paves the way for them to return. However, management's unlikely to restore shareholder returns as long as the pricing volatility remains.

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 shares trading below their long-term average, and given us reason to remain cautious.

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.

Full Year Results (underlying)

Revenue per customer at British Gas Services & Solutions rose 1% to £361. However, wage and higher material costs and pandemic-related expenses meant cost per customer rose 13% to £338. Together with a 4% decline in the number of customers, and some swapping to lower-priced products, this meant operating profit fell 37% to £121m.

With many competitors going out of business, British Gas Energy saw residential customers rise 5% over the year. Cost per customer fell 9% thanks to benefits of restructuring and efficiency efforts. Colder than normal weather and the group's ability to resell excess gas and power back to the market at higher prices helped operating profit rise 44% to £118m.

Total energy supplied by Centrica Business Solutions rose 14% as demand normalised following covid restrictions. The business reported a £52m operating loss, an improvement from last year's £132m loss as New Energy Services losses narrowed and business energy supply posted a £1m profit.

Capital expenditure at Bord Gais Energy was £37m higher than expected due to the Whitegate CCGT outage. The outage fed into a 33% decline in operating profits to £28m.

Energy Marketing & Trading saw operating profit fall to £70m from £174m. This was driven by lower Liquid Natural Gas (LNG) profits and a loss from the remaining gas contract relating to the Sole Pit gas field, which runs until 2025.

Upstream operating profits rose from £90m to £663m as higher oil and gas prices offset lower production volumes and a loss in the Nuclear business.

The restructuring is largely finished with the sale of Direct Energy complete and an agreement in place to sell Spirit Norway in the second quarter.

Free cash flow from continuing operations rose 71% to £1.2bn, owing mostly to higher profits. This fed into a net cash position of £680m, an improvement from net debt of £3.0bn 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: 24th February 2022