Centrica’s first-half revenue fell 10% to £11.9bn, driven by lower commodity prices and price volatility.
Underlying operating profit nearly halved to £549mn, but this was still better than markets had forecast (consensus: £531mn). The beat was driven by a stronger-than-expected performance in the Infrastructure division, which helped to offset weakness in the Retail and Optimisation divisions.
Free cash flow fell from £816mn to £244mn due to the decline in profits. Underlying net cash fell from £3.2bn to £2.5bn.
Centrica Energy (the group’s energy trading arm), is expected to report full-year underlying operating profits towards the lower end of its medium-term target range (£250-£350mn). All other Retail, Energy, Supply and Optimisation businesses are expected to deliver underlying operating profits within their medium-term target ranges.
An interim dividend of 1.83p was announced, up 22%.
The shares fell 1.1% in early trading.
Our view
British Gas owner Centrica saw its profits fall sharply in the first half, as some of its businesses that are sensitive to energy prices and market volatility underperformed. Despite this, group profits weren’t quite as bad as forecast, and all full-year guidance remains unchanged.
In spite of the first-half softness, we should point out that the group is making good progress towards its medium-term profitability targets across its different divisions. In fact, the majority of Centrica’s businesses look on track to deliver these targets ahead of schedule.
Operational performance is showing signs of improvement. Customer numbers are on the up again, after a period of outflows in the prior year, and customer satisfaction scores are moving in the right direction as complaints have reduced.
Centrica Energy is the group's trading arm, 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. Operating profits here were down more than 70% in the first half. Despite this, it's likely to be the group's biggest money-maker moving forward, even if energy prices and volatility dampen down further.
The Infrastructure division is responsible for the production of oil as well as the sale of power from its UK nuclear plants. Underlying performance has weakened in recent times, largely as a result of lower prices.
Big plans are afoot to turn the infrastructure segment into a renewable energy powerhouse. But the transition's not going to come cheap or quickly, with between £600-£800mn per year set to be invested in the transition out to 2028, which could put a strain on cash flows if returns aren't as high or quick as planned.
The balance sheet remains in good shape, with underlying net cash of £2.5bn. That means the recently reinstated dividend and extended buyback programme looks 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 couple of years, and the group now has a sizable cushion for any future bumps in the road. Profitability may come under pressure in the near term, but we feel that’s baked into the low valuation. Difficult market conditions mean sentiment could remain muted for a while longer.
Environmental, social and governance (ESG) risk
The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.
According to Sustainalytics, Centrica’s management of ESG risk is strong.
It has a board-level committee overseeing ESG issues such as safety and environmental programmes. Services have been digitalised to help improve customer experience and retention, however, customer complaints at British Gas Energy rose by 5.9% in FY22. Centrica also reports ESG information in its annual report, which does not follow best practices.
Centrica key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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