Centrica (LON:CNA) has handed wary shareholders a good reason to pull the plug after a shock profit warning.
Shocks
In its third quarter trading update, usually a dull one, the group reports that 823,000 customers left British Gas, the leading energy provider in the UK over four months to the end of October. The exact link to the profit downgrade is unclear, but the group now envisages full-year earnings per share coming in at 12.5p, around 17% lower than expected. A new operating cash flow forecast of more than £2bn is also light of market forecasts—by some £800m—after the £2.69bn generated in Centrica’s last financial year. The fall misses a long-standing pledge by the group to increase operating cash flow by 3%-5% per annum. Investors have also become increasingly sceptical about the group’s ability to come good on a two-year old plan to save £750m per year from 2020.
Easy target
Britain’s consumer and business energy market is one of the most competitive in the world and CEO Iain Conn has cited competition as a key reason as to why “service delivery with the Centrica Business energy supply businesses has been disappointing”.
On top of that, the government has appeared determined this year to impose tariff caps, prompting most operators, including Centrica, to state that such moves would be counterproductive. Pushing its own alternative, on Wednesday the group said it would stop offering more expensive Standard Variable Tariffs and urged the government to ban them outright. Centrica will not, however, exit an increasingly difficult consumer market unlike some rivals. The group’s size, visibility and to an extent, apparent willingness to accept social responsibilities that rivals do not have, exacerbated exposure to competition from the smaller and nimbler rivals that have proliferated in recent years.
Dividend eyed
All in, Centrica stock had already fallen 30% over the year up until last night’s close. Investors have been weighing how much of a new threat the toughening environment is to the group’s dividend policy. Pay-outs are a sensitive subject after Iain Conn gutted the dividend soon after his arrival around three years ago.
Time to re-think E&P
The bad news about the group’s annual result is now in, but energy market pressures are unlikely to abate in 2018. That suggests another poor price return for the shares next year. We also expect the return of vocal investor criticism of Centrica’s retention of capital-hungry and sub-scale exploration and production assets. Signalling a rethink about that division would be one way 2018 could end more positively for the group.
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