The Centrica (LSE: CNA) share price rocketed 20% higher on Friday morning. The firm revealed a surprise £2.85bn bid for its North American business, Direct Energy, and an increase in profits from its core UK consumer business.
I’ve been viewing Centrica as a value buying opportunity for some time. The latest news from the company confirms my belief that the stock remains very cheap at current levels.
What’s new?
The owner of British Gas has been trying to raise cash for a while by selling its North Sea oil and gas business and its nuclear power stations. However, these efforts have been put on hold by the coronavirus pandemic and financial market crash.
Centrica’s North American business wasn’t seen as such an obvious choice for a sale, but it fits well with new boss Chris O’Shea’s simplification strategy.
More importantly, the £2.85bn cash bid from US utility group NRG Energy will enable O’Shea to “reduce net debt significantly” and make a sizeable contribution to the group’s pension schemes. These measures are badly needed. Centrica’s net debt was £2,779m at the end of June, while its pension deficit stood at £522m.
I’m not surprised to see Centrica’s share price respond so strongly to the Direct Energy offer — I think a sale will provide a quick fix that’ll help the company move forwards.
Rising profits should have further to go
I think Centrica’s core UK consumer business is probably undervalued at the moment. Today’s half-year results seem to support that view. Excluding the US business that’s now been sold, consumer profits rose by 40% to £229m.
I’ve doubled this figure to give a full-year estimate of £458m. Crunching the numbers suggests to me this would give a price/earnings ratio of about 10 at Centrica’s current share price. That’s without adding in any contribution from the group’s other operations.
Looking ahead, I think the British Gas home services business has significant growth potential. This division provides services such as boiler installation and maintenance, as well as a wider range of insurance and home repair services.
FTSE 250 firm Homeserve is probably the UK market leader in this sector. Its shares trade on 30 times forecast earnings. If British Gas is well managed, I think it should be able to succeed in this market.
Centrica share price: No dividend yet but I’d keep buying
The only slight disappointment in Centrica’s half-year results was that the group won’t be declaring an interim dividend. Last year’s final dividend was cancelled too. This means shareholders will have to go at least 12 months without a payout.
However, fixing the group’s balance sheet and restructuring its operations must take priority. I’d expect dividends to make a return next year and am happy to take a long view here.
I own a sizeable slice of Centrica shares and I plan to continue holding. I believe this business should be worth significantly more in the future.
