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Why Centrica is a FTSE 100 share that still looks ludicrously cheap

The Centrica (LSE: CNA) share price has risen by 9% since the start of the year. This is a much-improved performance versus previous years, with the company’s shares coming under severe pressure as investor sentiment declined.

Even after its gains in 2018, the utility company appears to offer a wide margin of safety. In fact, it could still be one of the best-value shares in the FTSE 100, and may be worth buying alongside another large-cap which released results on Thursday.

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Low valuation

The company releasing results was tour operator Tui (LSE: TUI). Its third quarter performance was somewhat disappointing, with its EBITA (earnings before interest, tax and amortisation) declining by 8.8% to €182.6m versus the previous year. This sent its share price around 8% lower, although the prospects for the business remain relatively bright. It expects to deliver at least 10% growth in underlying EBITA for the full year, which would represent further progress under its current strategy.

The company has seen continued strong demand for Holiday Experiences. Additional hotel and cruise ship capacity has boosted the company’s performance, with its strategy of deploying capital into higher-returning assets seemingly successful.

Looking ahead, the stock is forecast to post a rise in earnings of 13% in the next financial year. Despite this, it trades on a price-to-earnings growth (PEG) ratio of 1.1. This suggests that it is relatively cheap at the present time, and could offer impressive capital growth. While in the near-term investor sentiment may remain downbeat following its mixed third quarter performance, Tui seems to be a strong business with a dominant position in its key markets. As such, now could be the right time to buy it.

Improving prospects

Centrica’s shares also appear to be cheap and could outperform the FTSE 100 over the medium term. The stock has a dividend yield of almost 8% at the present time, which makes it one of the highest-yielding shares in the index. This suggests that investor sentiment remains cautious ahead of what could prove to be a period of major change for the domestic energy supplier.

It is in the process of pivoting away from oil and gas exploration, seeking to become a more focused domestic energy supplier. This could create a stronger business which has a more reliable earnings and dividend growth profile. However, at the same time it means that political and regulatory risk may be higher, with energy price caps set to be introduced as the cost of gas and electricity remains a significant political topic of discussion.

Since Centrica’s dividend is due to be covered 1.15 times by profit in the current year, a modest decline in dividends cannot be ruled out. However, with its bottom line expected to grow by 7% in 2018 and the company due to deliver cost cuts, its total return potential appears to be impressive over a long-term time period.

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Peter Stephens owns shares of Centrica. 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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