Will May’s energy cap fit with Centrica?

LAST WEEK saw plenty of news for investors in Centrica, the parent of British Gas.

Monday brought a brief trading update covering the first quarter of the year. This was followed by confirmation the Conservatives plan to introduce a cap on energy prices, while the leaked Labour manifesto included plans to re-nationalise parts of the energy industry.

Despite warmer than normal weather in the first quarter, resulting in lower energy consumption, chief executive Iain Conn was pleased with Centrica’s progress.

Cost savings continue to be made, and the group remains on track to meet its operational targets this year. Debts are falling and cash flows look set to improve. After losing about 400,000 customers last year, another 261,000 left British Gas in the quarter. However, the exodus came as a result of the end of a ‘collective switch’ deal, where a third party negotiates on behalf of customers.

Centrica is now more focused on the value of customers, not just numbers. Service metrics are improving, and revenue from smart products was up 30 per cent to the end of April. More than 600,000 Hive hubs have been installed, and more than 900,000 connected products have been sold. In recent years, Centrica has moved away from the more volatile world of oil and gas exploration and production, with the focus moving towards its retail divisions, led by British Gas here and Direct Energy in the US.

With this in mind, the Conservatives’ pledge to cap prices must be annoying for the group, to say the least. Theresa May’s plans involve the imposition of a maximum price, managed by Ofgem. Limiting prices is clearly not good news. Nonetheless, with the best part of 30 million customers, Centrica should still be capable of growing profits, provided the details of the price cap are not too punitive. The shares currently offer a yield of around 6.2 per cent, and analysts are pencilling in a few years of steady dividend increases. However, with a dilutive share placing and 30 per cent dividend cut still fresh in memory, there might be a few nervous jitters among investors if execution is anything less than assured from here on. “This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”