The share price of Centrica (LSE: CNA) is down nearly 40% over the last 12 months and over five years the decline is just over 70%. The share price drop reflects the serious challenges the business is facing and which management haven’t been able to grapple with effectively.
The most recent results were deemed a success because the energy supplier managed to stem the numbers of customers leaving, but overall there’s little that appeals about the company heading into 2020. I fully expect the share price to keep falling.
The issues it faces
The problems that the group faces are numerous. There are the year-on-year declines in customer numbers. It shed a further 107,000 UK accounts in the four months to October. The rate of decline slowed in the second half of this year and while the churn is much lower than in 2018, it’s still a concern.
Centrica and its Big Six rivals have seen their customers leave and profit margins fall in the face of intense pressure from an influx of smaller, often cheaper rivals. The sector is still reeling from the effect of an energy price cap imposed by the government at the start of this year.
There’s also the looming threat of nationalisation in the event of a Labour government in the UK. Although this seems unlikely and the shares rose in response to the manifesto outlining nationalisation in more detail – because investors deem it highly unlikely – it’s still a threat that hangs over the share price to a degree.
At the year-end net debt will be between £3bn and £3.5bn and although debt is not unusual for utilities, given the high capital expenditure, it does become a greater burden when the business is struggling, as debt repayments eat up cash and stifle the ability of management to invest in growth.
The positives
For all but the biggest optimist there’s little to be happy about in my view. The most recent drop in customers was partially offset by an uptick in the number of customers in Centrica’s services and home solutions businesses. Efficiency savings are being ramped up to £250m.
Chief executive Iain Conn announced in July he would be stepping down as boss next year and the company is yet to announce his successor. That may provide a temporary boost for the share price depending on who is appointed and then what they announce they’ll do to turn around the business.
The value of the share price
For the most contrarian investors, the shares may appear like a turnaround opportunity. For most investors however, I think the risk is just too great. I see few indications to suggest the shares won’t fall further next year and I’m staying well clear, despite the price-to-earnings ratio of around seven.
