Today I am looking at why I believe Centrica (LSE: CNA) remains a high-risk share pick for investors.
Here are two numbers that I think help make the case.
102
The main bugbear facing Britain’s electricity suppliers continues to be the spectre of crushing regulatory intervention in the coming months and years.
Since Labour leader Ed Miliband pledged last autumn to implement a 20-month price freeze on energy prices should his party secure next year’s general election, politicians, consumer groups and regulators have been taking turns to question the profitability of the so-called ‘Big Six’ as household budgets remain under the cosh.
Calls for a radical shake-up of the sector were given fresh ammunition last month when Ofgem’s Supply Market Indicator indicated that average annual pre-tax profit per customer for these energy giants will rise to £102 during the next 12 months. This is more than double the £48 average recorded last year and compares starkly with profits of just £8 in 2009.
In the face of these mounting bills, the regulator has introduced new regulations which require suppliers’ annual financial statements to be independently audited from next year. Ofgem says that the rules will provide “greater clarity on main cost drivers behind customer bills” amid concerns that the likes of Centrica are failing to pass on falling wholesale costs to their customers.
And with public confidence in the fairness of current utilities prices at an all-time low, and the Competition and Markets Authority (CMA) still investigating the industry over claims of excessive profits, the country’s suppliers face the prospect of still-tightening regulatory changes.
138,000
On top of this, Centrica is also having to bat away the growing number of small suppliers which is significantly hitting its customer base. The firm’s July update revealed that the number of accounts at British Gas dived 4% on-year as of the end of June, to just over 24,000, and latest industry data suggests that this trend looks set to worsen.
Trade association Energy UK revealed that the number of customers switching from large suppliers to smaller ones hit a record 138,000 in October. In total 345,000 users changed energy company last month, up 33% from the previous month, and further indicating rising consumer reluctance to swallow the price hikes seen in previous years.
Against this backcloth Centrica may be forced to keep kicking tariff rises into the long grass, a worrying omen for future earnings growth.