Reasons I still wouldn’t buy Centrica shares even after the sale of the US business

Shares in Centrica (LON:CNA) rose 16% when it was announced that it was selling its US energy business to NRG Energy $3.6bn (£2.87bn) as part of a plan to turn the company around. Could this be akin though to turkeys voting for Christmas?

The move was justified as a way to make the group leaner and simpler. It increases its focus on the UK and Ireland. The restructuring comes on top of other actions the struggling group has taken. This has included axing 5,000 job cuts and changing staff contracts in a bid to hit a £2bn cost-cutting target a year early in 2021. It has also cancelled its dividend and suspended financial guidance.

The group which has dropped out of the FTSE 100 though is far from out of the woods yet. It faces a lot of challenges. This deal though does give it some cash and some breathing space. The price is has got also seems to have been good.

Overall though I don’t see much reason to be optimistic longer-term about the potential of the shares.

Reasons to avoid the shares

There are a number of reasons I’d want to avoid Centrica shares:

  • Continues to lose customers in the UK and Ireland
  • Share price has been falling for years
  • Share price performing worse than a competitor like SSE
  • Still involved in the oil market
  • Now dependent upon the UK and Ireland, so less diversified
  • High debt (even if this reduces a bit now)
  • Continuous poor financial results
  • Cancelled the dividend
  • Possibility for further political meddling (like with the energy price cap)
  • Nuclear power generated and oil production volumes both declined between 2018 and 2019
  • Lack of growth opportunities

The news of the sale of the US business came alongside results which showed profits falling – again. Centrica reported a half-year loss of £135m due to the coronavirus pandemic, low commodity prices and warm weather. On an adjusted basis, underlying profit fell by 14% to £56m.

It continues to lose customers. More than 100,000 customers left Centrica’s home heating brands in the last six months, including 62,000 British Gas clients in the UK. Both these poor results and the loss of customers are trends that have been going on for some time which is worrying.

Case of selling the family silver?

The US home business certainly seems when based on operating profit to be better than the UK home business. It was smaller but more profitable. Although the UK probably outperforms the commercial side. It’s unclear therefore if Centrica is selling off the family silver to survive, or whether this is a prudent move. I suspect it’s the former.

Other companies have moved more into the US, notably Ashtead, National Grid and Ferguson. A part of me thinks Centrica, despite its British Gas connection should have done the same. Instead, Centrica has followed the model of retrenching and focusing on its home market.

All in all, I see little reason to own the shares. The temporary boost to the share price from this sale may encourage some to take profits. Long-term I imagine the share price will l assume go back to its usual downwards trajectory.

Not surprisingly, I do not own shares in Centrica. I do own shares in National Grid which is mentioned.

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You can also read my latest article on why my DS Smith holding is under-performing.

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