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Is the Centrica share price too cheap to ignore?

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Shares in British Gas owner Centrica (LSE: CNA) have been languishing in recent months, trailing sector peers such as SSE and National Grid. From hitting a peak of just over £4 in 2013, Centrica’s share price has since more than halved to 153p.

Competitive pressure

Investors clearly believe Centrica stands to lose out big time against the looming price cap on energy tariffs and ongoing competitive pressures in the retail supply business. That intense competition was partly behind the loss of another 110,000 domestic customer accounts in the first four months of the year, which came on top of a decline of roughly 1.3m customer accounts last year.

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With a haemorrhaging of its customer base, there are growing worries about the impact on the company’s long-term earnings ability, not least because of the uncertain sustainability of its dividend. Let’s not forget that Centrica has already taken an axe to its dividend before — only back in 2015, the group cut its dividend by 30% after profits fell sharply in the wake of a slump in oil and gas prices.

Near-term tailwinds

But despite the tough operating environment, the company still generates good cash flow and has a high level of financial flexibility, which is underpinned by its relatively stable balance sheet position. Also reassuringly, the company said it expects to be able to maintain the current 12p per share dividend in the current financial year.

There are a number of near-term tailwinds to consider as well, including the improvement in commodity prices since the start of the year and a potential sale in its 20% stake in EDF Energy Nuclear Generation. Meanwhile earlier this week, City broker Jefferies upgraded Centrica to a ‘buy’ on expectations of a “more balanced approach” towards the impending introduction of the government’s energy price cap, following the release of Ofgem’s recent consultation paper which gave “detailed consideration of suppliers’ costs”.

Sure, there’s still a great deal of uncertainty with the Centrica’s long-term earnings outlook, but I reckon more of the risk is now on the upside. Shares in the group trade at just 12.5 times its expected earnings this year and offer prospective investors a very high dividend yield of 7.8%.

Contrarian opportunity?

Elsewhere, FirstGroup (LSE: FGP) is another stock that may interest contrarian investors. Shares in the transport group are once again trading close to a multi-year low after it swung to a statutory pre-tax loss of £327m last year. That was partly due to the impact of a writedown relating to its long-haul Greyhound business and an onerous contract provision on its TransPennine Express rail franchise.

The company, which recently rejected a potential all-cash offer from private equity group Apollo, could be on course for a major restructuring which could unlock value for shareholders. Following its dire annual results, Firstgroup said it was putting its Greyhound bus business in the US under review.

In the past, the group has repeatedly rejected calls for a break-up of the multinational transport company. But things may finally be about change given the mounting pressure to improve shareholder returns and changes at top-level management, which could bring a new approach to reviving the firm’s financial performance.

There’s certainly a lot to gain if a turnaround is properly implemented. But I’m holding out for a more detailed picture of its future strategic plans.

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Jack Tang has no position in any 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.

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