Another day, another big drop for the Centrica (LSE: CNA) share price.
The stock’s latest slump came after the company said it lost 372,000 customers in the four months to 31 October. Bosses also admitted that technical problems in its oil and nuclear businesses meant that output from both would be lower than expected this year.
Despite this, the firm said it’s on track to hit its financial targets for the year, including the dividend.
There’s good news too
I’ll come back to Centrica’s disappearing customers in a moment. First, I want to take a look the financial figures from today’s update. These suggest to me that chief executive Iain Conn is making concrete progress with his turnaround plans.
The company said that thanks to £200m of cost savings this year, it remains on track to hit 2018 targets for adjusted operating cash flow of £2.1bn-£2.3bn and net debt of £2.5bn-£3bn. Adjusted operating profit is expected to be “higher than in 2017”.
In turn, this means that the full-year dividend of 12p per share should be safe, giving a forecast yield of 8.9% at current levels. So it’s good news (for now) for income seekers.
Losing customers isn’t so bad
It’s worth remembering how the energy market has changed in recent years. Dozens of new small suppliers have started up, with the aim of taking customers from the big six energy firms.
Losing 372,000 home customers in four months isn’t ideal. But management said that some of these customers have left as a result of “our continued focus on value over volume”. Others have left as a result of the group’s efforts to reduce the number of customers on the Standard Variable Tariff.
I estimate that Centrica should still have about 23.7m home energy supply customers. I think that should be enough to provide serious economies of scale, in a properly-run business.
Turnaround: part two
It’s easy to forget that when Mr Conn took charge at the start of 2015, the group had net debt of more than £6bn. Cutting borrowings by more than 50% while stabilising the business is a significant achievement.
To complete his turnaround, he must find some way of returning the group to growth. This doesn’t necessarily mean more customers. It may mean selling additional services to existing customers, or creating new opportunities.
The firm’s Connected Home service is an example of this. British Gas’s Hive products enable customers to control their home’s heating and lighting through their smartphone from anywhere. Customer numbers rose by 280,000 during the four months to 31 October.
The group’s Distributed Energy & Power business is another area of growth. This business provides services that help balance supply and demand between renewables, conventional power and business customers. Orders have doubled so far this year.
Buy, sell or hold?
I think Centrica has a strong future. But it’s not yet clear how quickly the company will be able to return to earnings growth. I believe there’s still a risk that the dividend will be cut.
Trading on 10 times earnings with an 8.9% yield, I’d rate the shares as a turnaround buy for risk-tolerant investors.
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Roland Head 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.