Centrica - things are looking up at last

Centrica (CNA.L): When I last wrote on Centrica, in April, the share price was 265p. The General Election loomed, the Competition and Markets Authority investigation of the “Big 6” energy suppliers was in full swing and the new CEO, Iain Conn, had wheeled out a biggish kitchen sink. There seemed to be no rush to invest. Today the share price, having bottomed at 235p, is barely changed from then at 269p, albeit investors have scooped the 8.4p final dividend. There may still be no rush to invest, but the CMA’s initial findings were fairly benign and Dave the Chameleon surprised himself, and everyone else, by romping home in the election. The Labour Party had a dreadful time at the polls and their current flirtation with a Corbynesque lurch to the left reduces their ballot box appeal further. So the backdrop for Centrica (and other domestic utilities) has brightened.

In today’s interims, to 30^th June 2015, revenues fell by 2%, with adjusted operating profit down 3% to £1bn but adjusted eps up 17% to 12.3p. This was the benefit of the tax charge falling as a result of the reduction in upstream profits, whilst downstream profits increased. As previously forecast the interim dividend has been cut by 30% to 3.57p. Group net debt fell by 6% to £4.9bn, helped by positive free cash flows. In the strategic review, the group is re-focussing on the downstream energy customer. This means that E&P and central power generation are to be reduced in scale. Over the next five years £1.5bn of resource will be taken away from these areas, thus freeing up capital. They will exit from wind and their nuclear interests will “be regarded as a financial investment”. They are targeting £750m in cost efficiencies by 2020, with two-thirds due by the end of 2018, (although this becomes £300m once they adjust for smart meter roll-out and other “growth areas”). 6000 jobs will go, offset by 2000 new jobs in these growth areas. All this should help secure their investment grade credit ratings and achieve the return on average capital employed of 10%-12%. In the long term they are targeting operating cash flow growth of 3%-5% per annum, with dividend growth to reflect “sustainable operating cash flow growth”. This is predicated on “flat real oil and gas prices and normal weather”.

So if they deliver on consensus eps for this year of 18p, the PE is 14.9x. The 30% dividend cut takes us to a base of about 12p for the year, equivalent to a 4.5% yield. So it has been a rough year for Centrica, but the new CEO is bedded in, his strategic plan is in place and political and regulatory risks have receded somewhat. All this points to the conclusion that now is a good time to start squirreling the shares away again. (Neil Cumming^, 30^th July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower