I wrote about utility Centrica (LSE:CNA) in September when its shares were trading at 189p, noting its cheap P/E of 12 and tempting dividend yield of 6.4%. However, despite these attractions, I tagged it as a stock I’d dump.
My negative view was based on its seeming inability to find a sustainable growth strategy since its demerger from British Gas plc in 1997 and its awful long-term performance for investors. The share price was around the same level as at the turn of the century, while the 10-year annualised total shareholder return was minus 0.3%.
The return is even worse now, with the shares having collapsed to 139p after a profit warning last week. Nevertheless, on reduced earnings guidance of 12.5p and a maintained dividend of 12p, the P/E is down to near 11 and the yield is up to 8.6%. Is Centrica now a contrarian opportunity?
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Multiple headwinds
There’s certainly an argument for income seekers, based on the revised dividend forecasts from several brokers. Goldman Sachs is going for a maintained 12p dividend in 2018 and 2019 with a cut to 9.5p in 2020. Kepler and Investec are both forecasting a cut in 2018, the former expecting not below 10p but the latter a 30% reduction to 8.4p. So, it could be argued that the stock is worth buying today, because even if the dividend were to be cut to as low as 8.4p, it would still give a very decent yield of 6%.
However, Centrica’s earnings appear to be under tremendous pressure. There’s intense competition in its business-facing operations (both in the UK and US), while it’s also losing UK residential customers hand over fist. On top of everything else, UK policy-makers are looking to give regulator Ofgem increased (potentially profit-sapping) powers. In view of these multiple headwinds and Centrica’s record of dismal long-term shareholder returns, I err on the side of continuing to see it as a stock to avoid.
Eyes on the cash
Telematics firm Trakm8 (LSE: TRAK) released its half-year results today, reporting a 125% rise in earnings for the six months to 30 September. Its shares jumped 9% to 150p in early trading but have fallen back to 141p , valuing the AIM-listed company at £50m.
I’ve always had concerns about the ability of this paper earnings-grower to generate meaningful cash, so what caught my eye in today’s highlights was a 2,692% increase in cash generated from operating activities to £3.574m. I’ve had a close look at this. The table below shows some key cash flow numbers for the company’s recent first-half periods.
| H1 30 Sep 2014 | H1 30 Sep 2015 | H1 30 Sep 2016 | H1 30 Sep 2017 | |
| Net cash generated from operating activities (£m) | (0.197) | 1.295 | 0.128 | 3.574 |
| Movement in working capital (£m) | (1.292) | (0.426) | (1.147) | 0.126 |
| Interest (£m) | (0.035) | (0.041) | 0.000 | 0.014 |
| Income tax received (£m) | 0.000 | 0.000 | 0.143 | 1.643 |
| Operating cash flow before movement in working capital, interest and tax (£m) | 1.130 | 1.762 | 1.132 | 1.791 |
| Capitalised development costs (£m) | 0.368 | 0.581 | 1.145 | 1.756 |
As you can see, the £3.574m cash flow number highlighted by the company today benefits from a favourable movement in working capital (£0.126m), a bit of interest (£0.014m) and, most significantly, a £1.643m inflow from HMRC. Otherwise, operating cash of £1.791m is only at about the level of two years ago. And would be minimal if £1.756m of development costs (which are rising annually) had been expensed, rather than capitalised.
Until such times as Trakm8 demonstrates it can generate meaningful and increasing cash flows from its business activities, it remains a stock to avoid for me personally.
