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Is Centrica’s [CAN] share price in jeopardy after energy market price cap imposed?

2019 is shaping up to be a tough year for British Gas owner Centrica [CAN]. Customer desertions, underwhelming earning results and Ofgem’s price cap saw the stock shed over 5% in 2018. These headwinds are still prevalent, and investors will be asking whether the current share price will be worth the risk in the long-term.  

 

How has Centrica’s share price recently performed?

Despite recent woes, Centrica has had a better time of it than the FTSE 100. Centrica’s stock is down just over 2% from the same point last year compared to the near 10% drop experienced by the wider index. Shares hit a year high in July when they touched 164.5, although this was well off levels seen at the same point in 2017.Powered by CMC Markets, as at 22 January 2019

 

Taking a longer view, Centrica’s shares have long been on a downward trend having haemorrhaged around 60% over the past five years, and 20% in the previous two. Part of the problem has been flagging earning results. Last November’s disappointing earnings announcement saw Centrica forecast full-year earnings per share to come in at 11.5p, down from the previous estimate of 12.9p. This triggered the single worse trading day in the stock’s history, crashing from 145.75 to 132.30, a drop of almost 10%.

 

What’s dragging on the share price?

 

1. Energy price cap

Centrica have said that energy regulator Ofgem’s decision to set a price cap of £1,137 per household will result in a £70 million hit for the first three months of 2019. Over the full year, some analysts have predicted that the price cap, taken together with fluctuating gas and oil prices, could result in an 8% decline in profit. Unsurprisingly, Centrica have asked for a judicial review on how the cap is calculated.

 

2. Customer exodus

Along with the squeeze on prices, British Gas lost 372,000 customers in the 4 months to October. This represents an exodus of more than 90,000 customers a month, which is at least better than the previous period’s 100,000. While British Gas is still the UK’s biggest energy supplier, it is losing market share and has resorted to cost-cutting measures to shore up shareholder confidence. Last year, the company axed 4,000 jobs as part of an effort to hit a £200 million savings target.

372,000customers

Loss of British Gas customers in the 4 months to October

 

3. Brexit fears on energy flow

Not helping matters are fears that the UK could be in for a disorderly exit from the EU. The UK currently imports 6% of its energy and plans have been mooted to install 11 new interconnectors, which would increase the free flow of energy across international borders. With the UK expected to import more than a fifth of its energy by 2025, any disruption caused by trade barriers could hurt.

 

Is there opportunity in the Centrica share price?

Centrica has one of the best-performing dividends on the FTSE 100, paying out 8.9% compared to the index’s 4.8% average. Worryingly, Jefferies Financial Group have suggested that if gas prices drop over the next two years, then there won’t be enough cash cover for dividends.

 

H1 2018 profit, % change YoY-4%
Market cap£7.66bn
PE ratio (TTM)14.32
EPS (TTM)9.40

Centrica stock vitals, Yahoo finance, as at 22 January 2019

 

“We downgrade Centrica to hold, given we see material downside risk to 2019-20 earnings, borderline credit metrics and limited market-to-market benefits of higher commodity prices in the medium-term,” Jefferies said in a note to investors. In the note, Jefferies argued that Centrica needed to unload its two nuclear power stations for at least £1bn to plug a hole in its balance sheet.

The future looks decidedly mixed for Centrica. Earning results have failed to impress for some time, with full-year earnings per share expected to be two-thirds its 2014 level. Whether there is any upside in the stock after the previous years’ losses will depend on investors taking a longer-term view. Shareholders and analysts will be looking closely for clues when Centrica announce preliminary full-year results on 21 February.

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