Centrica plc (CNA) Ord 6,14/81p

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In a short trading update, Centrica revealed it expects full-year earnings per share to be in line with current market forecast of 18.5p. That’s down nearly 44% on the prior year, and mirrors the first half decline in profitability which was driven by lower commodity prices and lower energy price volatility.

Capital expenditure is to rise over the second half, taking the full-year total to around £600mn. The group expects to finish 2024 with a net cash balance of around £2.6bn, in line with consensus market estimates.

For 2025, all Retail Energy Supply and Optimisation businesses are expected to deliver underlying operating profits within their medium-term target ranges. British Gas Services & Solutions is expected to reach its medium-term target range by 2026.

A further £300mn of share buybacks have been announced and should be completed by September 2025.

The shares were broadly flat in early trading.

Our view

Profits at British Gas owner Centrica look set for a sharp fall this year, as previously expected.

The decline was largely due to a £500mn one-off recovery of costs from prior periods in the consumer-facing British Gas Energy division, which made for an extremely tough comparable period. This year’s performance has also been held back by lower energy prices and less market volatility, which the group typically benefits from.

This return to more normalised market conditions was expected. In the meantime, Centrica’s making good progress towards its medium-term profitability targets across its different divisions. In fact, the majority of Centrica’s businesses look on track to deliver these targets two years ahead of schedule.

Back at the half-year mark, overall performance was showing signs of improvement. Customer numbers have stabilised after a period of outflows last year, and customer satisfaction scores were moving in the right direction.

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 were down 40% too, broadly as expected. Despite this, it's still likely to be the group's biggest money-maker, even if energy prices and volatility dampen down further.

The Infrastructure division is responsible for the production of oil as well as the sale of power from its UK nuclear plants. Underlying performance has weakened in recent times, 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.

The balance sheet remains in good shape for now, with underlying net cash of £2.6bn expected at year-end. 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, and the group now has a sizable cushion for any future bumps in the road. Profitability may come under pressure in the near term, but we feel that’s baked into the low valuation. Difficult market conditions mean sentiment could remain muted for a while longer.

Environmental, social and governance (ESG) risk

The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.

According to Sustainalytics, Centrica’s management of ESG risk is strong.

It has a board-level committee overseeing ESG issues such as safety and environmental programmes. Services have been digitalised to help improve customer experience and retention, however, customer complaints at British Gas Energy rose by 5.9% in FY22. Centrica also reports ESG information in its annual report, which does not follow best practices.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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