Shares in British Gas owner Centrica plunged more than 9 per cent on Thursday after the group cut its dividend by nearly a third, and rebased it at this level going forwards, after the falling oil price contributed to a £1bn pre-tax loss.
Here is a selection of analyst comments:
Martin Brough, Deutsche Bank
“Centrica said that the decline in gas and oil prices, together with IT problems in the British Gas business has driven a 2.5p deterioration in the EPS outlook for 2015. This is understandable, but the more worrying aspect is the lack of compensation through a higher-margin outlook for British Gas. The company said that ‘it is vital that we focus on competitive pricing’ downstream. In our view this is the most worrying part of the announcement today — a 1 per cent change in long-run retail margins impacts on the group equity value by 10 per cent. 2015 EPS is expected to be down year-over-year. A strategic review has been announced and the company will report in this in July.
“It remains very difficult to put a value on the British Gas customer base, particularly ahead of the May 2015 UK general election and the Competition and Markets Authority inquiry conclusions. With further news to come in 2015, the stock may be volatile for some time.”
John Musk, RBC Capital Markets
“Centrica has announced 2014 results this morning that contain two major negatives. The dividend for 2014 has been cut and will now be 13.5p for the full year, which is a 30 per cent rebasing. Centrica has announced that it will no longer be selling its closed-cycle gas turbines, with bids received significantly below internal valuations, and this is likely to be a key factor in having cut the dividend.
“Centrica has also, yet again, reduced EPS guidance, and 2015 is now expected to come in below the 19.2p reported for 2014, with earnings now guided to be 2.5p worse (largely commodity-related) than at the time of the November IMS, when CNA was still indicating growth on 2014. This implies a 10 per cent cut to consensus EPS for 2015.
“With Centrica yielding over 6 per cent before the dividend cut, it could be argued that the market was already partly pricing in the dividend cut. Post cut, the yield is 4.8 per cent, which is broadly in line with integrated peers; however, we still believe this will be taken negatively by the market. More importantly, the downgrade to EPS guidance will be more unexpected and will likely put further pressure on the share price. Assuming EPS of 18p-19p (in line with new guidance), Centrica is trading above 15 times its price-to-earnings ratio, which in our view is too high for a company facing so many challenges. We continue to advocate an underperform stance.”
Mike van Dulken, Accendo Markets
“Shares are bottom of the FTSE this morning, testing three-year lows as investors express discontent with the company’s warning that 2015 earnings will be below those of 2014 due to ‘changes in the external environment’. Further wrath comes from the final 2014 dividend being cut by 30 per cent — twice as much as consensus — as a result of FY14 adjusted net profits dropping by 30.5 per cent to £927m. This is in-line with guidance thanks only to a November downward revision.
“The company still has to contend with pre-election political pressure to keep energy prices low given the recent fall in oil and gas prices as well as the CMA investigation into overcharging by the big six UK energy providers. No surprise to see capex on exploration and production cut given the lower oil prices, with cost cuts at certain projects and mothballing of others. Work to do to fire up a share-price recovery.”
Lewis Sturdy, London Capital Group
“Lower energy prices and warm weather are not helping. Consumers will have little sympathy after years of being squeezed; shareholders will be keenly watching cost-cutting measures as the outlook over the next couple of years remains weak for wholesale prices.”
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