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To be Centrica chief executive requires bulletproof armour. Whether UK energy prices travel up or down, one can expect sniping from local media and even the government about excessive tariffs. Yet the thumping 15 per cent drop in the utility’s share price on Thursday owed far more to events in the US than at home.
This week’s shelling came after Centrica cut its earnings per share forecast for the year to December to 12.5 pence. That falls short of analysts’ expectations by about the same amount as the markdown in its shares, and means more downward revisions to come. Mathematically, Centrica’s shares will not become any cheaper than they already are, at about 10 times forward earnings. That itself is not far off decade lows.
The noise was mostly about its loss of 823,000 customers in just four months. In fact, many appear to have been low-margin accounts that Centrica says it can afford to lose. CEO Iain Conn believes the group’s UK residential profits will actually match last year’s, a better result than many expected. UK Home accounted for more than half of operating profit last year.
Mr Conn will admit he deserves no medals for Centrica’s North America performance. Its US industrial customer division is suffering from excessive competition in northeastern power markets, and had a one-off loss accounting adjustment relating to a revenue recognition issue. US B2B was the group’s second-largest profit contributor last year, when it earned £220m in pre-tax profits. It should have bettered that this year. Instead, the unit will produce just £80m.
The result is that per share earnings will only just cover the dividend. But what matters is cash flow. Here, the news is better. Sufficient cash exists, after capital spending, to pay investors. The dividend looks safe from the onslaught, for this year at least.
Mr Conn, CEO for nearly three years, would have liked to sound the cavalry charge by now. Instead, the share price retreats with each passing month, down 25 per cent already this year. That produces a yield of over 7 per cent yield, reflecting concerns about the sustainability of the payout.
To stabilise the share price and restore faith in the dividend, Mr Conn needs to get his US flank under control. If UK Home is truly in better shape than thought, Centrica should rise out of the trenches in the months ahead.
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