Morningstar | Centrica's First-Half Results Are Below Expectations on the Bottom Line; Shares Slightly Undervalued
Centrica released first-half results below consensus expectations on the bottom line but roughly in line with our full-year estimates. The group also reaffirmed its GBX 12 dividend per share to allay investors' concerns over its sustainability. We maintain our fair value estimate of GBX 160 per share and our no-moat, stable trend ratings. Shares are slightly undervalued.Adjusted EBIT decreased by 4% to GBP 782 million, in line with expectations. Recurring net income decreased by 20% to GBP 358 million, 10% below consensus expectations, due to a higher tax rate owing to a rebound in exploration and production, or E&P, EBIT.
On the negative side, EBIT for Centrica's consumer division decreased by 20%. Key to that is the U.K. home segment, which saw its EBIT sliding by 20% due to a rise in commodity costs not fully passed through to customers despite the tariff hike in May. Also, U.K. retail supply activity lost 341,000 accounts, implying a churn rate of 2.6%, roughly in line with our 5.1% estimate for the full year. Centrica business' EBIT decreased by 57% to GBP 96 million. The decline was notably driven by a 55% drop in North American EBIT. However, we expect a strong improvement in the second half, as the profitability of this business was negative in second-half 2017. On a pro forma basis, power generation's EBIT was affected by unplanned nuclear outages.
On the positive side, E&P EBIT jumped from GBP 56 million to GBP 256 million due to higher oil and gas prices and higher volumes. Still, the group lowered its target production range for 2018 from a 50-55 mmboe range to 50 mmboe, strictly in line with our estimates.
Altogether, we expect profitability to rebound in the second half based on much easier comps. Therefore, we will not change our 2018 adjusted net income estimate of GBP 607 million based on a tax rate of 39%, in line with the first-half level. Still, we are 20% below consensus in 2018 and expect it to adjust downwards.
Centrica is an energy and services company. Co.'s segment are: Energy Supply and Services, which supplies gas and electricity in the U.K. and North America; Connected Home, which supplies energy solutions and technologies to residential customers; Distributed Energy and Power, which supplies energy solutions, generation and technologies to commercial and industrial customers; Energy Marketing and Trading, which trades and optimizes energy; Exploration and Production, which produces and processes gas and oil and develops new fields; Central Power Generation, which generates power from combined cycle gas turbines, wind and nuclear assets; and Centrica Storage, gas storage in the U.K.
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