Centrica Posts Stellar Profits in 2022, Announces Share Buyback

We don’t plan to materially change our GBX 140 fair value estimate after no-moat Centrica CNA released its highest annual earnings since 2013 and announced a new GBP 300 million share buyback. This reflects good stewardship, given the current material undervaluation of shares. Also, share buybacks suit Centrica’s high earnings volatility. The full-year dividend will amount to GBX 3.

Adjusted EPS for 2022 surged more than eightfold to GBX 34.90, above FactSet consensus of GBX 31. At its preliminary results on Jan. 12, the firm said it expected to deliver adjusted EPS above GBX 30.

The main positive driver was energy marketing and trading, whose EBIT jumped to GBP 1.4 billion in 2022 from GBP 70 million in 2021 due to high commodity price volatility and prices spread between different geographies. Nuclear’s operating profit was GBP 0.7 billion in 2022, largely improving from 2021′s small loss due to much higher achieved power prices. Likewise, EBIT for retained Spirit Energy’s assets surged almost fourfold due to the gas price rally. On the other hand, the retail energy services business posted a small operating loss after a GBP 0.1 billion profit in 2021 because of weak commercial performance and cost inflation not passed on to clients.

Centrica will launch a GBP 300 million share buyback in addition to the ongoing GBP 250 million one, meaning it will buy back 10% of its outstanding shares at the current price. Assuming the buyback is funded with the group’s net cash position, this points to EPS accretion of 10% from the total buyback, of which 6% will be from the incremental one. Valuewise, the incremental buyback announced on Feb. 16 will add GBX 2 to our fair value estimate, which isn’t meaningful.

As usual, Centrica hasn’t provided guidance for 2023. The hedged prices of its nuclear and gas production businesses are above our estimates but should be offset by a lower achieved price than we estimate for the unhedged part, given the recent decline in gas prices.