There’s political pressure on energy suppliers right now, and they’re also facing a bit of a squeeze from falling domestic demand.
Centrica (LSE: CNA) (NASDAQOTH:CPYYY.US), the owner of the UK’s British Gas and Scottish Gas brands, has a 15% fall in earnings per share (EPS) forecast for the year ending December 2014. There’s a bearishness affecting the share price, too, and it’s fallen nearly 20% over the past 12 months to 312p.
Will the doomsayers prove correct? We’ll be closer to knowing the answer to that on Thursday 31 July, when Centrica is scheduled to bring us first-half results.
Solid year
For 2013, the company told us of “solid year-on-year earnings in difficult market conditions“, with chief executive Sam Laidlaw saying that “market conditions are set to remain challenging in 2014“.
Operating profit in 2013 was down 2%, but EPS remained flat and the total dividend was lifted by 4%. Covered around 1.6 times by earnings, the cash payout provided a yield of 4.9% on Centrica’s end-of-year share price.
And although EPS is set to fall this year before picking up again in 2015, the city is still expecting to see a modest dividend rise of about 3%. Cover would drop to around 1.3 times, but after that share price fall we’d see a yield of 5.6% at today’s levels.
Revenue dropping
An update released in May revealed that residential energy bills at British Gas were down due to the mild winter by 10%, and confirmed that the company is unlikely to be able to raise prices this year. Centrica put the latter down to “the competitive market and wholesale price environment“, but fears of a potential hammering from political parties ahead of election year was surely also a factor.
UK energy demand has fallen further since the start of 2014, with Centrica expecting to see this year’s revenue coming in around 10% lower than 2013. Adjusted EPS for the year is expected to be in the range of 22-23p.
Looking further ahead, Centrica did predict a return to earnings growth in 2015, but that does assume that weather patterns in the UK and USA will return to normal — and these days, that seems like a less confident assumption that it would have been in times past.
But is it cheap?
What’s the Centrica valuation looking like?
The predicted EPS fall suggests a P/E of just under 14, dropping back to 12.5 by 2015. The energy industry might be under pressure right now, but at today’s price levels and with forecast dividend yields of better than 5.5%, I wouldn’t call Centrica shares too expensive.