British Gas owner Centrica (LSE: CNA) has been a disappointing and painful investment in recent years. The Centrica share price has now fallen by 90% from all-time highs of 390p+ in August 2013.
My own holding is deep underwater. So far, it’s been one of my worst investments ever. It’s tempting to write the stock off, but I think that would be a mistake. I’m convinced that Centrica shares offer value at current levels. Let me explain why.
The perfect storm?
The coronavirus pandemic has not made things any easier for interim chief executive Chris O’Shea to reverse Centrica’s falling share price. The ex-finance boss only took charge two weeks ago, but he’s already been forced to issue a pretty grim trading update.
Among the problems he mentioned were a slump in energy demand due to business closures, and an expected increase in bad debts. Revenue from the group’s service and solutions business is also expected to fall, as the company restricts its operations to essential work.
Elsewhere, the much-needed sales of Centrica’s nuclear power stations and its oil and gas business, Spirit Energy, have been put on hold following the oil price crash.
Unsurprisingly, the 2019 final dividend has been cancelled. The company has also withdrawn its financial guidance for 2020.
How much lower can the Centrica share price fall?
I don’t think the Centrica share price is likely to fall much further. There’s already a lot of bad news in the price. And for all its problems, I believe Centrica has some significant attractions.
First of all, it’s worth remembering that the coronavirus pandemic, although terrible, won’t last forever. When it’s over, Centrica’s customers in the UK and US will still need electricity, gas, and related services.
British Gas may not always have had the best reputation with customers, but it’s the biggest energy supplier in the UK, with more than 9m customers. That’s not likely to change anytime soon.
The firm’s reputation might even improve as a result of the current crisis – O’Shea says that several hundred service engineers have volunteered to visit customer homes for emergency repairs “where there may be a higher risk of COVID-19”. If you were ill and infectious and someone came to fix your heating, I imagine you’d remember them well.
Do the numbers add up?
A good story is no good if a company’s finances are unsustainable. Fortunately, I don’t think that’s the case at Centrica. Although I think the group’s £4bn debt pile is a little too large, very little of this needs to be refinanced before 2022.
In the meantime, Centrica has cash and unused credit facilities totalling £3.3bn. This is roughly equal to one year’s operating costs. This suggests to me that the group should safely be able to survive the coronavirus crisis lockdown period.
I think the key to unlocking a recovery in the Centrica share price is for O’Shea to be able to complete the transformation plans put in place by ex-boss Iain Conn. The end result should be a service business with higher profit margins and stronger finances.
I see Centrica as a value stock with good income potential. I’d buy at current levels.