Since the beginning of the year, the Centrica (LSE: CNA) share price has risen over 15%. And during the last 12 months, the stock has risen by more than 50%. Of course, past performance is not an indication of future returns.
But will the Centrica share price recover in 2021? I’m not so sure. The company is taking the right steps but I’m not convinced the stock can deliver the steady performance I’d expect from a utility share.
Centrica: an overview
Centrica is a utility company for both consumers and businesses. It has a few divisions but the main one is British Gas. This segment supplies gas and electricity to UK households and businesses, but also installs appliances like boilers.
Last year was not the best for the company. It delivered an operating loss in 2020 from its continuing operations of £362m. But things have not been rosy at Centrica for some time. Even before Covid-19, it generated an operating loss of £783m in 2019 from its existing businesses.
The problem has been that British Gas has been losing customers. And I think there have been a few reasons for this. Centrica has failed to adapt quickly enough to increased regulation and there has been fierce competition.
These issues have all been addressed by the current CEO Chris O’Shea. He joined the company in March 2020. So when there is a change at the top, I’d expect some sort of restructuring.
Bull case
Things clearly need to improve for the utility provider to boost the Centrica share price in the long term. And that is exactly what is happening.
The company is now simplifying by focusing on its core markets of the UK and Ireland. It sold its North American business, Direct Energy, for $3.6bn in cash. The sale proceeds will be used to shore up Centrica’s balance sheet, which should improve its financial position.
The company is also restructuring the organisation. In its recent trading update, Centrica highlighted that 98% of its UK workforce has agreed to new contracts. This could have turned out poorly for the utility provider, but management has successfully implemented new employment agreements.
In fact, the company expects to deliver year-on-year operating cost savings of more than £100m in 2021. This should boost profitability.
Covid-19 did disrupt British Gas. But as restrictions start to ease, I expect demand for British Gas’s UK businesses to improve. That’s especially so when most employees are likely to return to the office. This should also be positive for the Centrica share price.
Bear case
While the utility provider has made a good effort in terms of restructuring, it still has a way to go. I do not expect it to be smooth sailing either but it’s taking large steps in the right direction.
My concern is how Centrica is going to keep and attract new customers. Let me be frank, most consumers use some sort of price comparison website to find the cheapest energy deal. I know I do.
This has also meant that smaller challenger utility brands have popped up and are taking market share. I’m not convinced that the utility provider’s proposition is attractive enough to lure in new customers.
For now, I’ll only be watching the Centrica share price. But I’ll be eagerly waiting for the company to release its 2021 interim results on 22 July.
