Morningstar | CNA Updated Forecasts and Estimates from 22 Mar 2019
Centrica revised its strategy in 2015 to focus on customer-facing activities and downsize upstream activities . The company sold its combined-cycle gas turbines, wind farms, and oil and gas assets outside Europe and is acquiring small, light-capital-intensive companies involved in innovative energy services linked to digitalisation and efficiency. Management's bet is to leverage on the group's large customer base to embrace markets linked to new energy. Still, we believe those businesses have no moat and uncertain structural profitability. Retail energy supply in the United Kingdom is the largest activity, weighing one third of the group's operating profit. Historically, Centrica has been able to deliver higher margins than its competitors thanks to the scale provided by its leadership position. Political risk has dramatically increased since late 2013. In 2019, the implementation of a tariff cap should shave around 60% off the division's profits. We expect profitability to gradually recover as the group will continue to slash operating costs and the cap is set to be removed in 2023. Altogether, we expect the group to maintain the average profitability per customer, but the operating profit will not recover to pre-tariff-cap levels due to churn. Due to the earnings and cash flow drop in 2019, we estimate that the group will not meet its average adjusted operating cash flow target over 2018-20 required to maintain its dividend of GBX 12 per share. Therefore, we factor in a cut to GBX 9 enabling the group to save around EUR 0.2 billion of cash annually.We expect 2019 to be the earnings trough after five years of continuing slide. Accordingly, news flow should improve. The upcoming exploration campaign in the west of Shetland has great potential if the significant 2C resources prove commercial. That bodes well for the potential IPO of the exploration and production business. Moreover, the turnaround of the North America business division could significantly boost earnings. On the negative side, there is a risk of an increase in the pension deficit due to the upcoming triennal review.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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