ii view: British Gas owner Centrica prepared for tougher second half

AGM trading update to 4 June

• Expects full-year adjusted earnings per share to be in line with City forecasts
• As normal, expects profit to be strongly weighted to the first half of the financial year
• First-half results expected 25 July

ii round-up:

Centrica (LSE:CNA) is the biggest supplier of gas and electricity to consumers and businesses across the UK under its British Gas brand. It also supplies customers in the Republic of Ireland via Bord Gáis.

Other businesses include a global energy trading business, energy storage including its offshore Rough gas storage facility, some oil and gas production assets taking in its Morecambe Bay gas field, as well as a 20% interest in the UK’s portfolio of existing nuclear power stations. 

For a round-up of this latest trading update, please click here.

ii view:

Headquartered in Berkshire, Centrica employs more than 20,000 people including 7,000 engineers. Brands supporting its core British Gas supply business include Dyno, Hive and PH Jones. Centrica Energy, encompassing its global energy trading business, generates the second biggest slug of revenues, followed by Centrica Business Solutions, its upstream business and then Bord Gáis. 

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Top UK Shares

Geographically, just over four-fifths of its revenue is made in the UK, with 5% in Ireland and the balance from the rest of the world. Centrica rivals include SSE (LSE:SSE), Telecom Plus (LSE:TEP) and even oil majors such as BP (LSE:BP.) and Shell (LSE:SHEL) in relation energy trading and production. 

For investors, the weather and its unseasonal swings can cause uncertainty around customer energy demand at its supply business. Changes by the regulator can impact outcomes, with a possible pending change of UK government also raising potential for the goal posts to move, while costs generally for businesses such as wages remain elevated.

Management has previously pointed to sharply lower commodity prices and reduced volatility in lowering 2024 earnings given a return to a more normalised environment. It said: "Second half results are expected to reflect lower commodity prices and, for [Centrica Energy Storage Limited], lower seasonal gas price spreads and volatility." 

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• Should this soaring stock market still get your vote? 
• Stockwatch: this 9% dividend yield may not be available for long

More favourably, Centrica's diversity of businesses regularly sees tough conditions for one area countered by strengths elsewhere. Strong cashflow left it with adjusted net cash of £2.7 billion as at year-end 2023, while management continues to assess and invest in energy transition opportunities such as solar farms and carbon capture.  

For now, and while political uncertainty cannot be ignored, potential for share buybacks, a forecast dividend yield in the region of 3.5% and consensus analyst fair value estimate above 170p per share all offer grounds for optimism.

Positives

• A diversity of businesses
• Net cash held

Negatives

• Subject to government scrutiny 
• Expose to energy price movements

The average rating of stock market analysts:

Buy