US Edition Centrica
325p +0.7
Questor says BUY
Its American unit, called Direct Energy, contributes about 10pc of group operating profits. Centrica is hoping to grow this business substantially.
Direct Energy is one of North America's largest energy and energy-related services providers and its businesses range from natural gas production and power generation, to energy pricing and protection plans, together with a full line of energy efficiency and building comfort services. It has more than 6m customers in 10 Canadian provinces and 46 US states.
Centrica is taking lessons it learned in the UK in managing a complete energy chain. It owns producing assets and sells to residential customers, so this vertical integration smooths out swings in commodity prices.
Centrica is planning to double the operating profit generated by Direct Energy to £400m. It will
do this by organic growth and acquisitions, but stressed at the analyst presentations that it
would not overpay for any bolt-on purchases.
The group has had a North American presence for about 10 years, which is sensible because it is the largest energy market in the world. The US upstream gas business generates annual profits of about $25bn (£15.6bn), with power generation in the country making profits of $10bn each year.
This is an attractive industry, but the size of the profit pool makes it very competitive. The
key growth markets Centrica has identified are Texas, where 8pc of the US population live, and the US North east, where 37pc of the population resides.
These growth plans are certainly ambitious – but look achievable.
In its trading update, Centrica said first-half earnings will be lower than a year ago but this is hardly surprising.
Last year started with some extremely cold weather in the UK and consumption in the first four months of the current year was down almost 20pc compared with 2010's icy start to the year. Wholesale prices were higher and other non-commodity costs have been rising too.
The decline is expected to be partially offset by Centrica's North Sea fields, including relatively recent purchase Venture Production, and North American business. This is despite the fact that production in the UK is more highly taxed.
Centrica reiterated that it expected earnings growth – and analysts have pencilled in growth of some 4pc in earnings per share. It is likely that there will be a rise in gas prices at some point this year, following on from Scottish Power's decision to raise tariffs. Detailed first-half numbers will be released on July 28 – and there is little in the statement to prompt any changes in analysts' expectations. The shares are trading on a December 2011 earnings multiple of 12.1 times, falling to 11.1 next year. The yield is 4.7pc, rising to 5pc next year, so is attractive.
The shares were first recommended on May 12 last year at 283.9p and they are now 14pc ahead of the initial tip compared with a FTSE 100 up 7pc. The shares remain a buy for income and long-term growth.