Picture supply: Getty Photos
its price-to-earnings (P/E) ratio of 6, Centrica (LSE: CNA) could appear low-cost. On prime of that, on the present Centrica share worth, the British Fuel proprietor yields 3.1% — not a large dividend however nonetheless first rate in my opinion.
Even higher, at its interim outcomes level, the FTSE 100 agency was sitting on a internet money pile of £3.2bn.
So, whereas it has a market capitalisation of £6.9bn, when discounting for that money pile, the market is mainly assigning it a price of beneath £4bn.
May this be the kind of cut price I wish to add to my portfolio?
Massive model, huge money era potential
British Fuel definitely has its issues.
Repeated examples of horrible customer support have battered the corporate’s fame over time. In the meantime, the long-term demand image for gasoline appears to be like bleak. Fuel utilization within the UK has been in decline for a few years and appears set to proceed on that trajectory.
However whereas demand could also be falling, it’s nonetheless substantial. British Fuel (alongside different manufacturers Centrica owns) is well-known even when it isn’t extensively liked. That offers Centrica pricing energy.
In the meantime, the enterprise has an vitality buying and selling enterprise which means its fortunes are usually not essentially tied to ongoing demand for gasoline within the British Isles.
As the web money place reveals (Centrica was indebted only a few years again), it is a firm that is ready to generate sizeable quantities of money. I believe that would proceed to be the case.
Laborious to evaluate whether or not that is really a cut price
Regardless of that, I’ve no plans so as to add Centrica shares to my portfolio even when the present worth might seem like a cut price.
A postponed plan to ban the sale of recent gasoline boilers might prolong the lifetime of home gasoline utilization within the UK. However the long-term pattern is obvious: Centrica’s core enterprise might shrivel away over time.
I additionally am involved by the dangers posed by modifications in vitality costs, particularly for the buying and selling division. Whereas Centrica made a post-tax revenue of £3.9bn final yr, the prior 12 months had seen a £0.8bn loss. That kind of volatility in earnings could make me uncomfortable.
Provided that kind of volatility, it isn’t clear to me whether or not the low P/E ratio represents the kind of cut price it might initially appear to.
Why I’m not investing
Stripping it again to fundamentals, I stay unconvinced in regards to the long-term potential for Centrica’s enterprise.
It has strengths, together with a buyer base that is still giant even when it was a lot smaller than it as soon as was. However the demand outlook is bleak and in the long run I see actual dangers to Centrica’s present enterprise mannequin.
So I’ve no plans to place my cash into shopping for Centrica shares for my portfolio.
