Centrica needs brave activist to light its fire
FTSE100 exit looms after shares fall to 21-year low
SWITChED-ON investors in Centrica may have seen the writing on the wall regarding its dividend, which was slashed this week by a dismal 58pc.
But what they might not have expected was for the shares in the British Gas owner to plunge 19pc on Tuesday alone to a 21year low, wiping more than £1bn off the value of the energy giant and leaving it vulnerable to ejection from the FTSE 100.
As the company showed its boss Iain Conn the door, investors rushed to offload their stakes.
Any who held on – including a large number of the 600,000 retail investors, many of whom bought British Gas shares in the 1980s Tell Sid campaign – will be hoping Centrica’s fortunes soon pick up.
But is there light at the end of the tunnel? The departure next spring of Conn, who has presided over a 74pc fall in Centrica’s shares, will leave the door open for a chief executive with fresh ideas.
ThE company has already announced it will speed up its strategy of selling its oil and gas exploration assets, leaving that work to sector specialists like BP and Shell.
Instead, it wants to focus on providing its customers with more energy-related services such as insurance, repairs and ‘connected home’ technology, which allows users to control their heating from their phone.
Effectively, Centrica thinks it has a captive audience of gas and
electricity customers and it wants to flog them more add-ons.
But Russ Mould, investment director at AJ Bell, thinks Conn’s replacement will have a job on his hands to turn around the struggling firm’s performance.
During Conn’s four and a half years in charge, almost 3m British Gas customer accounts were closed as customers flocked to other providers.
‘Centrica really needs to improve the customer offering,’ Mould says. ‘It’s all very well trying to sell people more services, but it won’t get far if customers keep leaving.’
Energy giants like Centrica have faced stiff competition in recent years from challenger companies, like Ovo and Bulb, which are more at ease with technology and spend less on staffing and offices. And the Government has piled on the pressure by introducing an energyprice cap, banning companies from charging extortionate bills to customers on default tariffs.
Earlier this week, Conn said the cap had cost Centrica around £300m this year – adding that he had high hopes that Boris Johnson’s government might roll back the measures.
All of these gathering clouds contributed to a £569m first-half loss at Centrica, which slashed its £650m dividend from 12p to 5p.
But with the problems fully aired, and the shares down correspondingly, some investors might be thinking that now looks like a good time to buy Centrica.
Sam Arie, an analyst at UBS, says: ‘It could have been worse, and with a cash dividend of 5p confirmed, investors now have some motivation to wait around and see what happens next.’
Any investors who decide to sell out now will likely be crystallising a painful loss, as the shares are down 82pc since their peak in 2013. holding tight might be the easiest option to stomach.
But Arie cautions against getting too excited, adding that this week’s half-year update highlights the unpredictability of Centrica’s business.
And the picture may get worse before it gets better. John Musk at RBC Capital Markets explains that shares could slip lower as Centrica sells its nuclear and energy and production assets, and holds on to the money to fund improvements and cover its dividends.
The Centrica debacle will come as a warning for any savers hoping to scoop chunky dividends for a cheap price.
And while the firm says it expects its dividend to grow by 1.5 to two times over the ‘medium term’, Musk thinks it is hard to see any improvement through into 2020.
BUT there may be one more hope for Centrica investors, aside from waiting years for the company to pull its act together.
The recent tumble in its share price, combined with the need for a radical overhaul at the company, could make it an appetising prospect for activist investors.
Mould notes that high levels of regulation in the energy sector might put some off – but for a brave activist with a strong idea, Centrica is a sitting duck.
Without any input from a headstrong external party, investors in the once-mighty energy giant are facing a long, slow slog back to profitability.