US Edition Centrica
332.2p -1.2
Questor says BUY
Yesterday's third-quarter update indicated that everything was on track and the company is delivering on its goals.
Vertical integration is important for companies involved with commodities such as gas, because it removes some of the risk of price volatility. This basically means that a company owns all parts of its supply chain, so market fluctuations in the price of gas will not hit its business hard.
Centrica, through its purchase of FTSE 250 oil and gas company Venture Production, has its own oil and gas production. Because of this, it will not be held hostage to any wild swings in energy prices, something that could potentially happen in the future.
Its purchase of a 20pc stake in nuclear group British Energy also means that it will own part of the UK's new generation of power stations, giving it exposure to a developing low-carbon energy business.
Centrica shares edged lower after yesterday's statement because there was no upgrade to full-year expectations, as some had hoped. Instead, the company said it expected full-year operating profit would be slightly ahead of current market expectations – offset by interest and tax charges, in particular in respect of joint ventures and associates.
This means that Centrica expects earnings per share will be in line with current expectations "subject to the usual variables of weather, commodity prices and production performance".
Of course, the main thrust of government policy is for us to use less energy through efficiency savings – and this trend was reflected in the statement.
Residential gas usage fell 2pc and electricity consumption was 1pc lower in the third quarter when compared with the equivalent period of last year.
The company has a large services business, so it is likely to benefit from energy efficiency measures, even as demand is reduced.
Centrica is the largest installer of solar panels in the country and also said yesterday that it would buy Cool Planet Technologies, a heat-pump installation company, for £500,0000 in cash. Cool Planet designs, sells and installs environmentally friendly heat pumps both directly for customers and also as a sub-contractor for larger projects in the commercial and public sector.
Centrica-owned British Gas continues to grow its market share. Since the start of the year, the number of residential energy supply accounts has increased by 270,000, while the number of services accounts has increased by 181,000. The gas distribution arm of the company will increase charges by 7pc from the start of next year, which should help support margins in the first half of 2011.
The shares are trading on a December 2010 earnings multiple of 13.3 times, falling to 12.3 next year. The yield is 4.1pc, rising to 4.5pc next year, so is attractive for income seekers.
The shares were first recommended on May 12 at 283.9p and they are now 17pc ahead of the initial recommendation compared with a FTSE 100 up 6pc. The shares remain a buy.