Centrica plc (CNA) Ord 6,14/81p
HL comment (24 July 2020)
Lower demand for energy from businesses meant first half revenues fell 9% to £12.5bn, with underlying operating profits falling 14% to £343m. Taking into account exceptional items including restructuring costs and impairment charges to the E&P and Nuclear divisions - Centrica reported an operating loss of £135m, an improvement on last year's loss of £446m.
The group announced plans to sell its US energy supply business Direct Energy to NRG Energy for £2.85bn. The proceeds will be used to pay down debt and contribute to the group's £522m pension deficit. Pending approval from shareholders the transaction is expected to complete in Q4 2020.
As lockdowns ease Centrica is seeing energy demand starting to recover and without a second wave, expect this to continue. However, the group's outlook remains cautious, particularly in regard to customer bad debts, and as a result is unable to provide full year guidance.
The shares rose 33.5% in early trading.
Centrica's uphill battle in the Consumer and Business divisions, while also trying to exit oil & gas and nuclear operations, has been rumbling on for a while. The challenges have only been made worse by the global coronavirus crisis and oil price crash.
The UK's lockdown and shift to working from home has reduced Business energy demand. And while there's been an uplift in residential demand, it's nowhere near enough to plug the gap. With both homes and businesses in immediate financial hardship - Centrica is braced for an increase in bad debts and deferred payments.
Retail energy supply, through Direct Energy and British Gas, is Centrica's bread and butter. It's less capital intensive, so should be more cash generative, but that's a theory the group has struggled to turn into reality. An energy price cap in the UK has also served to cap profits. And the rise of price comparison websites and smaller challengers means Centrica's found its margins squeezed and customers harder to hold on to.
While the first half painted a familiar retail story, news of Centrica's sale of US based Direct Energy, was warmly welcomed by the market. The price offered, is a significant premium to the business's book value and a big step in the group's restructuring and reorganisation plans to become a "simpler, leaner business".
The deal also takes the pressure off the drawn out sale of the group's E&P and nuclear businesses - where both the financial and oil market disarray means divestment plans will take even longer.
The Business division, home to energy trading and business energy supply, is somewhat of a mixed picture. Returns in the trading business saved the day this half, but tend to be turbulent and therefore less reliable. While business energy supply, in normal times, suffers similar challenges to the retail division.
There are signs energy demand is starting to recover, but the outlook for earnings remains unclear. While disruption rumbles on access to cash remains key. Fortunately Centrica has quite a lot of it - with £1.3bn of cash in hand and access to a further £2.9bn if needed. If the Direct Energy sale goes through, the proceeds will help to pay down debt, which has risen to 3 times last year's cash profits.
Recent restructuring strides are important steps in the right direction but there's still a long way to go. Until Centrica's situation becomes clearer, we continue to believe it won't perform like a normal 'steady Eddy' utility.
Centrica key facts
- Forward Price/Earnings Ratio: 7.5
- 10 year average forward Price/Earnings ratio: 11.7
- Prospective yield: Centrica's dividend is currently suspended due to coronavirus
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.
Half Year Results (underlying results used)
Centrica Consumer operating profits rose 37% to £328m, largely reflecting cost savings across different divisions. In UK Home supply (home to British Gas), warmer weather and a lower number of customers accounts offset increase in energy demand as the UK worked from home. UK Home Services was disrupted by lockdown, boiler installations dropped by 40%, but a higher number of customers and use of government support helped the division remain profitable. Both Irish and North American businesses were impacted by coronavirus but only North America was able to offset the impact with cost savings. Home Solutions reduced its operating loss despite lower sales thanks to higher margin products.
Centrica Business made a £4m operating loss in the first half, compared to a profit of £9m last year, as bumper profits in the Energy Trading business offset losses in all business energy divisions. Lockdowns significantly reduced business demand which, together with increased bad debt provisions, led to the UK, North America and Centrica Business solutions all recording losses for the period - totalling £120m.
Upstream operating profit fell by 87% to £19m reflecting lower commodity prices and production. Despite this, Spirit Energy is expected to be at least cash flow neutral for 2020 and 2021. The sale of Spirit Energy and the nuclear business remains on hold.
Despite lower profits free cash generated over the first half was £750m, £320m higher than last year. That reflects a better working capital position (the difference between a company's readily available assets and debts due to be paid within a year) as more customers paid bills and the delay of a Danish tax bill - which is expected to reverse next half.
Net debt was 18% lower at £2.8bn. As at the end of June, Centrica had £1.3bn of available cash and £2.9bn of undrawn credit facilities.
In June Centrica announced a significant restructure, which is mostly expected to take place in the second half of this year. The result will be fewer business units and reduction of about 5,000 members of staff.
Thanks to the restructure, Centrica now expects to achieve its cost savings target of £2bn in annualised savings between 2015 - 2022, by next year.
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