Last week’s results revealed a 35% fall in profits and triggered a sharp sell-off that saw the British Gas owner lose 17% of its value in one day. Today I want to look at whether the situation is really this bad, or if the market’s reaction is a potential buying opportunity.
Good news on services
Last year’s problems mostly revolved around energy production. But Centrica is moving away from this side of the business. Chief executive Iain Conn believes the future lies in supplying energy and related services to consumers and businesses. And here, there was some good news.
The number of customers taking services such as boiler maintenance from British Gas rose by 5% to 7.9m. Centrica’s Home Solutions group, which includes the Hive business, now has 1.2m customers. That’s a 33% increase on the 902,000 reported at the end of 2018.
As the services business expands, it’s becoming more profitable. My sums suggest that the gross profit margin per service customer rose from 10% to 15% last year. I’d expect further gains as growth continues.
Business profits up too
Centrica’s Business division also reported an improved performance last year. This part of the group supplies energy to business customers in the UK and North America. It also has a growing services business that helps companies use power more efficiently.
This side of the business performed quite well in 2019. Customer numbers rose by 2% to 512,000. Total energy consumption was 6% higher, at 332TWh. And revenue from business services climbed by 36% to £285m.
The end result was that adjusted operating profit from business customers rose by 189% to £217m. This division now generates nearly a quarter of the group’s profits, a figure I expect to increase.
The bad news
I’ve highlighted the good news so far in this article. But there was plenty of bad news too. Lower oil and gas prices caused adjusted operating profit from the group’s oil and gas business to fall by 68% to £179m.
Meanwhile, the number of customers taking electricity and gas from British Gas is still falling. The number of consumer energy supply accounts fell by 2% to 11.9m last year. Although that’s a smaller fall than the 6% drop seen in 2018, it’s still not great news, especially as the government’s energy price cap resulted in a one-off £70m hit to profits.
Here’s the big problem
Centrica’s figures were poor and the outlook for 2020 is worse than expected. But I think that the real reason why the shares crashed is that markets hate uncertainty. And there’s lots of this at Centrica at the moment.
Iain Conn is expected to leave this year and chairman Charles Berry, who is in charge of recruiting a new CEO, is currently on sick leave. Elsewhere, the sale of the group’s nuclear power stations is taking longer than expected. And we don’t yet know what kind of price the group will get for its Spirit Energy oil and gas business.
It all adds up to a heap of uncertainty. But these problems will be solved eventually. I believe that what’s left behind will be a more attractive business.
I intend to continue holding my shares, and might even buy a few more.
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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.