ShrutiAggarwal
Member Since 8 December 2015
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Last Seen: Tue 11:17
Posted on 27 March 2018, 9:29 AM

Centrica Plc, an avoid for the time being

Topics: Analysis
Other Insights on Related Shares: CNA.L
Related Shares: Centrica Plc Share Price

Centrica Plc. is an avoid at the current price level as the stock still looks like in a correction mode. The stock finished trading at 133p a share on the London stock exchange, up by 0.38% compared to the previous close. In terms of technical terms or charting, the stock still looks a little weak and we expect the downside correction to continue for some time. On a daily chart, the stock has formed a triple top pattern which indicates that the upside is restricted and the stock has a more room for downside. The momentum oscillator crossover also indicates the bearishness of the stock. The immediate support and resistance for the stock lies at 124p and 147p respectively. A move above 147p can indicates some upmove in the stock. However, a break below 124p can take down the stock to even lower levels. Therefore traders or investors would be advised to keep an eye at the respective levels and accordingly initiate their positions.

Let’s throw some light on the latest financial results of the company announced on 22nd Feb 2018. As per the results, the company’s adjusted operating profit was down by 17% because of reduced profit in Centrica business. Adjusted earnings were  also down by 22% on account of high net finance cost. However, the good news for the investors is that the net debt had come down by £877m to £2.6bn, which is at the lower end of the company’s target.

The company’s CEO commented on the results of the company,” Our financial result in the second half of 2017 was weak, primarily reflecting poor performance in Business energy supply and particularly in our North America Business unit. The combination of political and regulatory intervention in the UK energy market, concerns over the loss of energy customers in the UK, and the performance issue in North America have created material uncertainty around Centrica and, although we delivered on our financial targets for the year, this resulted in a very poor shareholder experience. We regret this deeply, and I am determined to restore shareholder value and confidence. The underlying trends driving our strategy are clear, as are the distinctive capabilities we have to benefit from them. We are committed to delivering attractive returns and growth over the medium term. Our focus today is on performance delivery and financial discipline - on demonstrating top line growth as we deliver improved service and new propositions for our customers, and driving efficiency as hard as possible to underpin our competitiveness”

 

Earnings Outlook:

Based on the above discussion, the management guidance and our own estimates, we estimate Centrica's 2018 revenue will be £28.864 billion (£28.023 billion for fiscal 2017) and the adjusted operating profit will be £1.077 billion (2017 operating profit was £1.245 billion). We have revised our estimates post the yearly results. Our estimates are conservative and assume 2 % year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 1.7%. 

 

Valuation:

From 2013 through 2017, Centrica PLC has traded at an average enterprise value by sales multiple of 0.64x. That assumes a multiple of 0.50x to calculate the target price. Based on this ratio and on estimated 2018 sales, the stock price target is 237 pence. 

Therefore, we set 6 months to 12 months target price of 160p of Centrica plc.


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