After years of dismal performance, the Centrica (LSE: CNA) share price ended last week on a high. It jumped by 33% in early trading on Friday, to end the day a whopping 17% higher.
Investors were celebrating the news that the group is selling its US energy business to NRG Energy for £2.87bn, as part of a much-needed turnaround plan. The Centrica share price has been one of the worst FTSE 100 performers in recent years, falling 82% over the last five years. The fightback is now underway.
Centrica has been hit by a combination of weaker oil and gas prices and disgruntled home energy customers leaving in droves. The Covid-19 stock market crash made a bad situation worse. Business energy demand fell sharply as offices and factories locked down. Centrica reported a 9% drop in first-half revenues to £12.5bn on Friday, while underlying operating profits fell by 14% to £343m.
FTSE 100 bargain buy
The group posted an operating loss of £135m after restructuring costs and impairment charges. At least that was an improvement on last year’s £446m loss.
In normal times, these results wouldn’t have triggered such a surge in the Centrica share price, but these aren’t normal times. It helped that the Direct Energy sale will attract £1bn more than analysts reckon it’s actually worth in the current climate.
The proceeds will go towards shrinking Centrica’s debt, which is already in decline. It now stands at £2.8bn, down £400m since the start of the year. It’ll also help narrow the group’s £522m pension deficit.
Like many other companies, Centrica is taking advantage of the crisis to cut costs and jobs, and accelerate its plans to simplify the group. Management has targeted annualised cost savings of £2bn between 2015 and 2022. It now looks set to achieve that in 2021, one year early.
I’d buy the Centrica share price at today’s level
The Direct Energy sale will make up for the frustrations Centrica has faced when trying to offload its nuclear and oil & gas businesses. Given the current uncertain energy market, its struggle to find buyers looks set to continue for some time.
The Centrica share price looks cheap today, trading at just 6.46 times earnings. You don’t get any income with that, as Centrica put its dividend on hold during the pandemic. Despite that, I think now’s starting to look like an attractive entry point.
Centrica continues to bleed retail customers though, with another 100,000 or so households moving on in the last six months, including 62,000 British Gas clients. The end of the lockdown should revive energy demand from businesses and, at some point, that dividend will be restored.
The road to recovery may be long, but management seems to be heading the right direction. If I had £1k to invest, I’d consider buying the Centrica share price today.