ii view: profits boom at British Gas owner Centrica

Its shares are trading at their highest in almost four years and the company is paying a dividend again. Buy, sell, or hold?

Full-year results to 31 December

• Adjusted operating profit of £3.3 billion, up from £948 million
• Final dividend of 3p per share
• Net cash of £1.2 billion

ii round-up:

Energy supplier and owner of gas and oil production assets Centrica (LSE:CNA) today reported full-year profit which beat City forecasts. 

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Higher energy prices following the war in Ukraine helped push upstream adjusted operating profit to £1.79 billion from last year’s £663 million. Total adjusted operating profit rose to £3.3 billion from the prior year’s £948 million, exceeding analyst estimates by around 7%. 

Centrica shares rose by more than 3% in UK trading to prices not seen since spring 2019. They're now up a third over the last year, similar to oil major BP (LSE:BP.) and compared to a gain of 5% for the wider FTSE 100 index. 

Profit on the same basis for Centrica’s British Gas supply business fell 39% to £72 million as it boosted customer support and continued to invest in sharpening operational efficiency. Profit at its Irish supply business rose 11% to £31 million, with adjusted profit at its hedging or Energy Marketing and Trading (EMT) division business soaring to £1.4 billion from last year’s £70 million.   

Hindered by the loss of customer numbers as consumers look to reduce outgoings, Centrica's boiler and other services business reported an adjusted loss of £9 million.   

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A final dividend of 3p per share follows the reinstatement of shareholder payouts at the half-year results in July, and leaves the shares sat on an historic dividend yield of around 4%. Centrica’s existing £250 million share buyback scheme is being extended by a further £300 million. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

ii view:

Centrica supplies domestic and business customers with energy in both the UK and Ireland via its British Gas and Bord Gáis Energy in the Republic of Ireland. Its EMT division trades in liquefied natural gas and gas, often connecting suppliers in the wholesale markets, while its Upstream business owns gas and oil exploration and production assets, along with a 20% interest in the operational UK nuclear power generation fleet. 

For investors, and as with business in general, elevated inflation is raising costs. The weather and its unseasonal swings also cause uncertainty over customer energy demand, while gas and oil prices for its upstream business remain highly volatile, going from lows during the global pandemic to highs just after Russia’s invasion of Ukraine. 

More favourably, strong cashflows have pushed net debt in previous years into net cash, the dividend is being paid again, while the company is looking at opportunities to invest in energy transition through battery storage, solar farms, and carbon capture.

For now, and with the consensus analyst estimate of fair value standing at over 130p per share, investors with an appetite for risk are likely to stay put for the long term.

Positives

• A diversity of businesses
• Back paying a dividend

Negatives

• Subject to government scrutiny 
• Uncertain economic outlook

The average rating of stock market analysts:

Buy