When I suggested recently that the Centrica (LSE: CNA) share price could hit 55p this year, I thought I was probably exaggerating.
Now, with the shares hovering around 65p and no good news in sight, I’m not so sure.
Centrica is the worst-performing share in the FTSE 100 over the last month, six months and 12 months. That’s a pretty dire record for a supposedly conservative utility stock.
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Investors have rightly criticised the group’s apparent lack of a clear strategy. Some are even suggesting that this business could end up being broken up and sold off.
I’ve been taking a fresh look at the stock following July’s half-year results and the news that chief executive Iain Conn will step down in 2020.
Breaking it down
Centrica has been one of my worst investments for a long time. Despite this, I haven’t sold the shares. I probably won’t. My policy is to hold shares long term for income, unless I think the company is likely to fail completely.
I don’t think that’s the case with Centrica, as I’ll explain.
The Centrica group is made up of a number of businesses, some of which are due to be sold. I’ve been taking a look at the core Centrica Consumer business — which is based around British Gas — to see what it might be worth on its own.
Customers have been leaving British Gas in droves over the last few years. But there are signs that customer retention is improving. According to the latest figures, the number of home energy supply accounts rose in May and June.
Home services — such as boiler servicing and repair — are also more popular. Customer numbers in this segment rose by 140,000 during the first half of the year. The number of boiler installs also rose, by 2%, to 52,000. I’d expect that this will provide a reliable supply of future servicing work.
What’s it worth?
Over the last 12 months, Centrica Consumer has generated an underlying operating profit of £560m. However, profits fell sharply during the first half of this year. If we use the most recent six-month period as a guide, then we get a figure that’s closer to £500m per year.
If I was to value this business on a standalone basis, I’d suggest a figure of about 10x profits, or around £5,000m. However, this would be an estimate of enterprise value, which is market cap plus net debt.
Centrica’s net debt currently stood at £3.4bn at the end of June. When added to the group’s £3.8bn market cap, that gives an enterprise value of £7.2bn.
Some of this relates to parts of the group that are to be sold, such as the Spirit Energy oil and gas business and the firm’s nuclear power stations. Proceeds from these sales will be used to repay debt and strengthen the group’s financial situation.
If the group’s next chief executive can make these disposals at attractive prices and stabilise Centrica’s Consumer business, then I think the shares might now be close to their fair value.
However, a turnaround is far from certain. UK utilities also continue to face political risks, such as nationalisation and the price cap.
I expect the Centrica share price to stay low for a while. I’d wait for signs of recovery before thinking about buying.
