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Centrica Shares Crash on Profit Warning

British Gas parent company admits full-year profits will be below target, leading the shares to fall more than 15%

James Gard 23 November, 2017 | 9:36AM

Gas ring

Shares in UK energy firm Centrica (CNA) crashed on Thursday as it said that its full-year profits would be below forecasts.

The British Gas parent company, which has a five-star Morningstar Fair Value Rating, said trading conditions continue to be highly competitive and performance delivery within the Centrica Business energy supply operating has been "disappointing".

Morningstar equity analyst Tancrede Fulop said that Centrica was being placed under review amid expectations for a "material downgrade to our forecasts and valuation".

Centrica said it now expects its full-year adjusted earnings per share to be around 12.5 pence, which it noted is lower than market consensus. Operating profit is expeted to be £156 million for the full year, below the £221 million for 2016 and the £255 million expected by analysts for this year.

"The structural profitability of this business is well below market expectations," Tulop said.

This is largely as a result of a lower-than-expected adjusted operating profit in North America Business and UK Business, as well as an expected hit from warmer-than-normal weather across October and November in the UK. The company lost 823,000 UK retail customers in teh four months to the end of October

Centrica said it has faced significant market pressures in its North America Business retail power book, and its UK Business has not yet seen its improved operation performance flowing through to the bottom line.

Additionally, it will see a one-off non-cash post-tax charge of £46 million in its North America Business, related to the reassessment of past power revenues.

"Although some aspects of our delivery in the second half of 2017 have been disappointing, I remain encouraged by our progress in implementing our strategy. The balance sheet has been materially strengthened, and we continue to focus on improving our underlying performance," said chief executive Iain Conn on Thursday.

Centrica's Declining Market Share

Morningstar analysts have assigned a “narrow moat” to Centrica, which means that it has a slender competitive advantage, because of the intense competition in the UK retail market.

Charles Fishman said: “In our opinion, the retail energy supply business does not warrant an economic moat. Retail power and natural gas markets are highly competitive, with virtually no barriers to entry and low switching costs. Retailers mostly compete on price, given customers' guaranteed service through the delivery utility and the commodity product that eliminates quality differentiation.”

“Centrica's British Gas brand name has significant value, but brand loyalty to a commodity product can be fleeting, as the decline in Centrica's share of the residential UK gas market illustrates. Although British Gas remains the dominant market share leader, its share of natural gas retail customers has steadily declined, but still remains over 35%.”

Earlier this week the company said would be scrapping its higher standard energy tariff amid threats from the UK Government to cap energy prices. Centrica will stop offering is standard variable tariff by 2018. 

The British Gas company also said this week it was not planning to follow SSE (SSE) and Npower (IGY) in spinning off its UK retail energy business, saying the UK was still an attractive place to be a retail supplier.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Centrica PLC145.40 GBX2.76
innogy SE38.97 EUR-0.43-
SSE PLC1,328.00 GBX0.68
About Author

James Gard  is subeditor for Morningstar.co.uk