Between a peak in July 2018 to a low in August this year, shares in British Gas owner Centrica (LSE: CNA) lost 60% of their value.
Amid growing competition and falling customer numbers, profits have been in a slump, and by 2018 earnings per share (EPS) had declined 58% over a five-year period. There’s a further EPS slip on the cards for the current year, of 37%, but forecasts indicate a healthy reversal of that in 2020 with a 36% uptick.
There’s evidence of improving sentiment in the share price too, up 22% since August’s dip, and that includes an 8% boost on the back of Thursday’s trading update. Could be time to buy?
Net total gain
While the four months to October resulted in a loss of 107,000 energy supply customers, growth in services and home solutions led to a net increase of 136,000 total accounts in the period. While it’s still disappointing for shareholders to see further declines in energy supply accounts, the net loss was “lower than in the first half of the year and significantly lower than in 2018, despite continued high levels of price competition and market switching.”
We mustn’t forget that Centrica is active in the USA too, and there it saw its number of accounts increase by 86,000. Account numbers in Ireland were broadly stable.
Chief executive Iain Conn said: “Our performance has been solid so far in the second half of the year and we remain on track to achieve our full year targets for both adjusted operating cash flow and net debt.”
On those scores, Centrica says it expects adjusted operating cash flow for the year in the lower half of its target range of £1.8bn-£2bn, with year-end net debt within its target of £3bn-£3.5bn. Efficiency savings should come in around £300m, ahead of a £250m target, and capital investment should be down £100m at £800m.
The move away from being purely an energy supplier to provide wider customer services (and you must have seen, for example, the Hive ads on TV) has to be a sound plan in my view. It provides a bit of differentiation, with better margin products and services.
Would I buy the shares now? After the demise of Thomas Cook and a good few other companies finding themselves in tricky recovery situations, I’m really steering away from recovery candidates now until I see the recovery actually hitting the bottom line.
I’ll miss the cheapest price that way, but I’ve never had any real success at bottom picking anyway. And it should keep me safe from potential wipeouts.
But looking at Centrica, I really can’t help thinking the shares are in buy territory. Even with the expected drop in EPS this year, we’re still looking at a prospective P/E of 11 — and that would drop as low as eight if the 2020 earnings upturn comes off.
The pain of a dividend cut has already been suffered, with this year’s payment to be slashed to 5p per share, from the 12p handed out in 2018. It would be covered 1.4 times by forecast earnings, which is reasonable for this sector, and cover would rise to 1.9x in 2020.
I think the dividend is probably safe now, and with a yield of 6.4% I find it tempting.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019