Centrica (LSE:CNA) shares made headlines on Thursday as the scandal-hit firm posted record profits of £3.3bn, driven by soaring wholesale gas prices. In response, the share price jumped around 7% before giving back some of those gains on Friday morning.
Full-year results
Annual earnings for 2022 more than tripled versus the £948m made in 2021. Higher gas prices bolstered revenue by 61% to £23.7bn.
The higher energy prices meant that Centrica’s North Sea operations brought in exceptional returns, although these are subject to a windfall tax. The group’s profits from its 20% stake in the UK’s nuclear facilities are also subject to the electricity generator levy.
Centrica’s £3.3bn in earnings came in significantly above the previous record profit of £2.7bn in 2012. Meanwhile, net cash rose to £1.2bn at the end of 2022 compared to £700m a year earlier.
The bumper results paved the way for Centrica to announce a £300m share buy-back, sending the company’s shares to their highest level in almost four years.
These record profits were announced against a backdrop of a cost-of-living crisis, during which many Britons were struggling with soaring energy bills. Centrica defended itself saying it spent £75m on support schemes for retail and business customers last year.
Valuation
Centrica shares peaked at 105p on Thursday, before falling to 103p in early trading on Friday. The stock hasn’t traded so high since 2018. And with earnings per share (EPS) for 2022 rising to 34.9p — from 4.1p in 2021 — the company trades at around three times earnings. That’s very cheap.
However, investors are unlikely to see the current level of profitability as sustainable. Energy prices were exceptionally high in 2022 as a result of Putin’s war in Ukraine. Even if revenues remain strong, there will likely be increasing demand for broadening the windfall taxes on energy companies.
In the spotlight
It’s worth noting the differing fortunes of the upstream business, where energy is taken out of the ground and sold for sky-high prices. Plus the British Gas business that distributes energy through an expensive grid with thin margins, into a highly competitive marketplace.
But to many, the 700% jump in profits, and even larger leap in EPS, will be hard to swallow. That’s despite British Gas seeing profits fall 39%, partially due to its spend on customer assistance measures.
Centrica had recently been shamed by an undercover newspaper investigation. It revealed the firm used debt agents that broke into customers’ homes and forced them to use prepayment meters in an effort to recover debts.
Following Thursday’s results, several MPs called on Centrica to use its “obscene” profits to compensate its prepayment meter victims.
With all the uncertainty surrounding the energy business and the possibly of wider windfall taxes, I’m not looking to add this stock to my portfolio. Although, I admit, it’s hard to find a cheaper FTSE 100 stock at the moment.
