Centrica (LSE: CNA) recently announced a profit of over £1bn, something that made plenty of UK newspaper and business headlines. The Centrica share price has seen a huge 85% increase over the last 12 months. But with a soaring profit, I think it’s set to climb even higher.
The cost of living crisis has ramped up electricity bills. This has led to investors diving into this energy stock as revenues inevitably increase. But let’s take a look at why I would still add this energy stock to my portfolio at 87p.
Energising finances
Energy bills have been rising steadily over the last decade. But the current cost of living crisis has seen the price of energy consumption skyrocketing. This has been excellent news for Centrica.
Net cash turned around from a debt of £93m in 2021 to a positive £316m this half-year. Also, gross revenues from Centrica’s energy trading increased from £8.7m to £15.8m. This demonstrates excellent managerial strategy, I feel. However, I’m concerned that the company may overdo its investment in the energy market. Energy prices may become increasingly turbulent and further investment means it would have a large financial, as well as operational, exposure to this volatility.
The company also announced a dividend of 1p per share. This closes the stock’s two-year gap in dividend payments. With the financial instability of the pandemic now fading away, I believe that Centrica can continue its dividends for the foreseeable future.
The share price has slowly crept up from 74p since January. Now, in its half-year report, Centrica has shown a huge turn around in debt, revenue and dividends. This leads me to believe the share price could be set to climb even higher.
Managing expansion
It’s clear that the energy stock is in a momentous position. With accelerating financials, and dividends reinstated, the share price seems to be headed upwards. But this does raise one question — how will the company drive this momentum forward?
Many UK energy companies ceased trading over the last year (just over half). This led to Centrica taking on 0.55m new customers in 2021 and 0.15m in 2022. This is great news for revenues. The creation of 500 customer service roles and 1,000 engineering apprenticeships suggests management is responding well to this expansion.
However, the cost per customer increased £3 to a total £96 in the same period. Also, the company stated that customers have switched to lower-priced products as a result of the cost of living crisis. This has led to cash flow from operations decreasing from £558m to £165m.
Yet Centrica’s £800m sale of Norwegian E&P business to Sval Energi and Equinor demonstrates a healthy operational reduction. Management aims to minimise portfolio risk and focus on UK interests. With soaring profits back home, I think this is a well-executed strategy.
Overall, Centrica has regained financial strength — and finally got its dividends back on track. Management has also adapted quickly to its UK expansion through a larger workforce and selling of foreign assets. This leads me to believe the share price is set to climb even further and I will be looking to add Centrica shares to my portfolio.
