Investments In Flexible Generation And Technology Will Streamline Operations, But Revenue Decline And Margin Pressures Are Anticipated

Key Takeaways

• Increased customer engagement and service delivery in Services and Solutions could drive revenue growth and improve net margins.
  
• Strategic investments in flexible generation and capacity market contracts are poised to boost long-term infrastructure revenue and EBITDA.
  
• Centrica faces revenue pressure from declining infrastructure profits, energy market volatility, policy changes, and economic hardships, with risks to long-term growth and sustainability.

Catalysts

Operates as an integrated energy company in the United Kingdom, Ireland, Scandinavia, North America, and internationally.

• Centrica's projection of £1.6 billion in EBITDA by 2028, with 85% from existing businesses and projects in progress, suggests confidence in revenue growth driven by operational improvements and strategic investments.
  
• The focus on Services and Solutions, with plans to grow customer numbers and enhance commercial offerings, indicates potential for revenue growth and improved net margins through increased customer engagement and service delivery.
  
• The ongoing share buyback program, which aims to repurchase about a quarter of the company’s shares over three years, is expected to significantly enhance earnings per share (EPS) as it reduces the number of shares outstanding.
  
• Strategic investments in flexible generation like gas peakers and storage in Ireland, alongside other capacity market contracts, are poised to boost revenue and EBITDA from Infrastructure assets over the long term.
  
• Centrica's commitment to operational excellence and integrating advanced technology such as smart meters and demand-side response systems is anticipated to streamline operations, leading to improved net margins and cost efficiencies.

Centrica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Centrica's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.7% today to 3.3% in 3 years time.
• Analysts expect earnings to reach £664.0 million (and earnings per share of £0.15) by about February 2028, down from £1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £819 million in earnings, and the most bearish expecting £441 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from 5.5x today. This future PE is lower than the current PE for the GB Integrated Utilities industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 3.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Centrica Future Earnings Per Share Growth

Risks

• Centrica's Infrastructure segment faced lower operating profits due to declining storage profitability and reduced nuclear power prices, which could pressure revenue and affect EPS forecasts.
  
• The energy transition, while an opportunity, involves uncertain technological shifts that require disciplined investment, creating a risk of potential misallocation affecting future revenues and returns.
  
• Prevailing government policy changes and unpredictable energy market regulations could amplify operational risks, impacting net margins and overall financial projections.
  
• The dependency on natural gas and nuclear energy amidst energy market volatility poses energy security risks, possibly affecting long-term revenue and EBIDTA growth.
  
• Economic hardships and potential increases in energy prices could raise bad debt levels and regulatory costs, impacting net earnings and the sustainability of Centrica's business model.

Valuation

• The analysts have a consensus price target of £1.674 for Centrica based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.15, and the most bearish reporting a price target of just £1.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £20.1 billion, earnings will come to £664.0 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of £1.45, the analyst price target of £1.67 is 13.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.