Centrica, the owner of British Gas (but not to be confused with BG Group), came back to the market with its final results last Thursday.
As ever, the results failed to impress the market and the shares subsequently dipped 8p to 327p at the open and traded in that range for much of the morning.
The flipside to this failure to meet market expectations is the political criticism that is always aimed at Centrica whenever it does make what is deemed excessive profits (its an easy day for the media when it does make a profit!).
So on one hand the company hasn't made enough profit but on the other hand it has made too much! This then is the fine line that Centrica has to tread.
The danger in this concentrated criticism for the company is that it continues to be seen as a takeover target (I can't see it ever being re-nationalised), but not by some benevolent charity, instead the cash rich Russian state backed Gazprom which has well publicised intentions of growing its UK market share (British Gas has approx. 42% market share).
It will be interesting to see how human rights organisation, pressure groups and charities (and of course the all powerful regulator) cope then with the possibility of price increases and unpaid bills leading to the shutdown of gas supplies as experienced by the Ukraine when it disputed price increases. Better the devil you know perhaps?
Also, what hasn't been picked up on are the year on year comparables.
In the last few years Centrica has invested heavily in nuclear energy with EDF at £2.272bn (remembering that it was the UK Government that sold British Energy to Energie de France), and the North Sea based company Venture Productions for £857m, as it seeks to preserve energy supply security for its operations and the UK. The EDF investment secured 30% of the Nuclear output and the second buying up oil and gas assets.
The sale of British Energy does raise an answer and and unrelated question though. The question (slightly off subject) being where has the money gone that the Labour Government raised from the sale? Apparently, £2bn was raised in 2006 from a 25% stake offloaded in the open market then the sale to EDF raised £10bn net of the Governments 30% plus stake which suggests another £5bn (if £10bn is 2/3rds).
The second point being that Government recognizes that it cannot afford to invest in the design, infrastructure and maintenance of such a venture. Ditto for other utilities such as Centrica, National Grid et al.
Looking at Centrica's results:
- pre-tax profits increased to £2.8bn (£996m), on almost flat revenue of £22.4bn (£22bn) but, as stated, note the comparable in 2009, a year of significant investment, is only £996m.
- £1.7bn invested in 2010; £1.5bn organic investment programme for 2011
- 163% production replacement ratio in UK upstream gas and oil.
- £450m investment approved to develop York and Ensign gas fields in the UK North Sea
- Full year dividend up 12% to 14.3 pence per share
On this years numbers the company is rated at 13.2 times price to earnings falling to 12.3 and 11.4 if single digit growth forecasts are to be believed.
In 2008 the company's capital was financed by just 16% of borrowings which increased to 80.77% in 2009 to finance investment programmes but has fallen to 61.33% in 2010. Concerning in comparison to 2008 but also an indication of why Centrica needs to make a profit. As it stands gross interest of £486m is well covered by profits (if maintainable) at 4.4 times.
Domestically, its increase in margins seems to have been achieved by its increase in services such as heating, boiler, and kitchen appliance cover (I have spoken to many people who think this to be value for money!).
Cashflow per share has been volatile through the last few years but for the last 2 years has been constant at around 50p per share. Put against the Earnings per share figure of 25.2p it suggests that Centrica is doing a good job at managing its revenues to minimise overdraft borrowings.
Traditionally, I wonder if this has been the case when, up to 2008 the company maintained an average cash balance of around £20m. The influx of financing funds in 2009 increased this to £2.9bn and it sits at £1.294bn in 2010's results.
Gearing at 16% was low prior to this period though so it could be a case of short term borrowings & cash flow v long term finance (but which is more expensive?).
The dividend is only covered 1.76 times by earnings (14.3p : 25.2p), and at 4.3% is not overly attractive for a utility but should be maintainable and Centrica is expected to continue to support the yield of 4.3%
Some concerns for me then.
The company does not always appear to have managed cash particularly well so that is something to keep an eye on going forward. I also wouldn't call 2 years a trend particularly with the exceptions: finance raising and investments undertaken.
If cash balances continue to deteriorate it will likely expose cashflow and increase short term borrowings which in turn will reduce the ability to increase the dividend, my key reason for holding Centrica.
However, the company has evolved somewhat in the last few years having secured part of its supply needs and added the service arm to its bow (where premiums are taken up front).
There will continue to be a "take-over" element although at current levels this does not feel to be priced in. Personally I would hope that this is blocked by the government as a strategic asset under energy security but I can't think of any cabinet in the last 20 years that has taken such a view with many assets being smoothly accommodated into foreign ownership (more fuss seems to have been made over BSkyB!).
So, Centrica then, well its a hold, watch and see for my Value and Income portfolio.
Centrica @ 337.1p, -2.1p (-0.62%), as at 11.17am.
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