Centrica’s share price has outperformed over the past year due to the rising price of oil and gas. However, its recent decision to pull out from acquiring collapsed energy startup Bulb has not been welcomed by all investors, and the stock has dipped slightly as a result.
In the 12 months to 4 July, the Centrica [CNA.L] share price has soared 56%, making it one of the UK’s top performing stocks. This rapid growth has been prompted by the rising price of commodities, which contributed to the company’s recent record financial results. This has also enabled the group to re-enter the FTSE 100, prompting further gains.
However, the rise in commodity prices have not been good news for all UK energy suppliers. For example, Bulb, previously the country’s seventh-largest supplier, was unable to deal with the price increases, causing it to collapse before it could raise further funding to keep the business going. As a result, the group was put into special administration in November 2021. It is now being auctioned off by the government.
Centrica pulls out of Bulb auction
Centrica, which also owns British Gas, was one of the potential buyers of Bulb. However, at the end of June, it was announced that the group pulled out of the auction process, leaving just two potential bidders. According to the Financial Times, this decision was likely to be because it was unwilling to take on the Bulb’s large amount of liabilities. The Competition and Markets Authority may also have influenced the decision, because Centrica already has a very large market share in the UK.
However, some investors have been disappointed with the firm’s decision to pull out, and the Centrica share price has sunk 0.4% since the news emerged on 26 June. This may be due to a sentiment that an acquisition could have led to growth in the group’s customer base.
Excellent financial results
The recent dip in the Centrica share price is insignificant considering its rapid growth over the past 12 months, which has been helped by strong financial results in 2021.
In the year ended 31 December, the group saw improvements in every part of the business. For example, adjusted operating profits increased 112% year-over-year to reach £948m. Total free cash flow also increased 71% year-over-year to £1.2bn. This was the result of the reduced impact of the pandemic on the company, alongside higher commodity prices in the upstream division.
These results have also enabled the group to strengthen its balance sheet. Its net cash stood at £680m, compared with net debt of nearly £3bn last year. This should leave the company extremely capable of dealing with the current energy crisis. Centrica is also likely to reinstate its dividend soon, although the payout is expected to be small.
In part due to these excellent financial results, the Centrica share price has risen 14.5% since the start of the year. This is far larger than the FTSE 100, which has dipped 2% in the same period.
What’s next for the Centrica share price?
In the company’s trading update at the start of May, Centrica announced that it expected adjusted 2022 earnings per share to “be around the top of the range of more recent analyst expectations”. Earnings per share expectations among analysts range from 6.7p to 10.8p. Therefore, as earnings per share totalled 4.1p in 2021, Centrica is growing its profits quickly.
Analysts are also confident about the prospects for the Centrica share price, with JP Morgan, Royal Bank of Canada and Morgan Stanley giving the company ‘outperform’ or ‘overweight’ ratings in recent months. Citigroup also gave a ‘buy’ rating to Centrica shares after it was re-admitted into the FTSE 100 in May. According to MarketScreener, the group has three ‘buy’ ratings, eight ‘outperform’ ratings, five ‘hold’ ratings and one ‘sell’ rating. The average price target for the shares is 100.4p, implying an upside of 22.7% on its 4 July closing price.
Disclaimer Past performance is not a reliable indicator of future results.
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