Centrica plc (CNA) Ord 6,14/81p
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HL comment (15 February 2024)
Underlying operating profit fell from £3.3bn to £2.8bn. Improved profitability at British Gas was more than offset by declines in its Trading and Infrastructure divisions, largely as a result of lower energy prices and volatility.
Free cash flow fell from £2.5bn to £2.2bn. Underlying net cash more than doubled to £2.8bn.
By 2026, Centrica expects to deliver "sustainable" annual underlying operating profits of around £800mn. The trading division is expected to contribute the most to this total, with profits set to be in the £250-350mn range.
The group announced a dividend of 2.69p per share taking the full-year total to 4.0p, up 33%. £613mn worth of share buybacks were completed in the period.
The shares rose 5.4% following the announcement.
Our view
British Gas owner, Centrica, has made great strides in turning the business around in recent years.
There was a strong recovery in the British Gas Energy (BGE) division, with performance buoyed by increased allowances in the UK price cap in the first half. This allowed a significant one-off recovery of costs from prior periods, providing a boost of around £500mn to underlying operating profits. The majority of these tailwinds have been felt now, and over the medium term, profits in this division are expected to moderate to around £150-250mn per year.
The recently renamed 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. Profits here have nearly halved from the dizzying heights of 2022, but it's still the group's biggest money-maker, and it's expected to remain so even if energy prices and volatility dampen down.
The Infrastructure division is responsible for the production of oil as well as the sale of power from its UK nuclear plants. Underlying performances weakened largely as a result of lower production volumes. That trend's likely to continue in the near term as big plans are afoot to turn this 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.
Customer numbers in the British Gas Services division fell by 8% in 2023 as cost-of-living pressures drove customers to search providers for the cheapest deals. Most of this customer shift came in the first half, and it appears things have stabilised since. The group has invested heavily in improving its service levels, and it's beginning to show through lower job rescheduling rates and complaints. Margins here are heading in the right direction and the division's returned to a slim profit.
The balance sheet is in good shape, with underlying net cash of £2.8bn. That means the recently reinstated dividend and extended buyback programme looks 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. The group now has a sizable cushion for any future bumps in the road. But as volatility and energy prices fall, some of the recent tailwinds will likely come out of Centrica's sails, and profit growth will likely moderate.
Centrica key facts
Forward price/book ratio (next 12 months): 2.97
Ten year average forward price/book ratio: 2.75
Prospective dividend yield (next 12 months): 3.5%
Ten year average prospective dividend yield: 5.7%
All ratios are sourced from Refinitiv, based on the 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.
Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
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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