What can I say about Centrica (LSE: CNA) after its shares have lost nearly 65% in a little over five years, and are now trading at levels not seen since 2003? The biggest question is whether Centrica shares are worth buying now, and I can see some good reasons to say yes.
Oversold?
While the shares have undeniably performed atrociously, the price has flattened off this year — and it’s actually slightly ahead of the FTSE 100 so far in 2018, with a 5.5% gain. Does that mean the market thinks the sell-off really has gone far enough and we’re now at the bottom?
Well, I hate attempts at timing the market, because it’s pretty much an impossible task — and I know I’m certainly no good at it.
But at the halfway stage this year, Centrica reported “stable adjusted gross margin and EBITDA relative to H1 2017,” and that was during a period of rising oil and gas prices and covered some extreme weather conditions. Chief executive Iain Conn reckoned that showed resilience, and I agree.
We’re facing energy tariff caps, which are still to be finalised, but I see Centrica’s restructuring and cost-saving as set to turn things round in the near future. And the past years of earnings falls are forecast to level off. I see too much fear still in the share price.
Big dividend
Centrica’s dividend this year is currently forecast at a massive 8%, so why is the market valuing the shares on a forward P/E of under 12? The obvious assumption is that investors see a cash squeeze, and don’t expect the firm to be able to make good on that.
But my colleague Roland Head examined Centrica’s cash flow situation recently. Considering the firm’s expected operating cash flow, operating cost savings, and reduced capital expenditure for the year, he reckons there should be enough cash to cover the dividend and that it should be safe.
Even if, as many fear, the dividend might need to be cut back a little if earnings growth doesn’t resume soon, an 8% yield has room for that, while leaving a still-attractive payout.
Cash cow
The energy sector is a long-term cash cow, with a product that’s not going to go out of fashion. I know there are serious ongoing moves to renewable energy, but that’s going to take a long time, and the medium term future for oil and gas is surely safe.
But the real bottom line for me is that a company with annual operating cash flow of around the £2bn mark must be a sensible investment, mustn’t it?
Debt is an issue, with net debt standing at £2,886m at the interim stage this year. But that’s only slightly above estimated annualised EBITDA, and I don’t see it as a major problem.
I was bearish over Centrica back in February, but seeing how the year has gone, I’m really starting to think the time might now be ripe.