Calling the bottom of the great decline in the Centrica share price is not easy. Punctuated by the occasional brief rally, the shares have been sliding for more than two years. In the autumn of 2013, they fetched more than £4 apiece. They are now perilously close to the £2 mark.
The decline in the wholesale gas price is responsible for much of the damage. A threatened regulatory crackdown hasn’t helped. And the occasional botched project has added to the sense of a company struggling to come to terms with a more hostile world of cheaper energy.
Yet Iain Conn, the former BP group managing director who arrived as chief executive in January, has taken the tough decisions, including slashing the dividend, and is already starting to claim some success. Yesterday’s trading update was upbeat and filled with targets achieved or beaten.
Mr Conn inspires confidence — he looks like a man with a good plan. The company is on track to deliver £2 billion of cash this year. Capital spending is falling as promised. Costs are being reduced as signalled. Meanwhile, British Gas’s retail customers are proving reassuringly sticky after the two price cuts this year.
There are some disappointments. The billing problem with business customers is only “largely resolved”. This is an IT shambles that happened more than a year ago and has not yet been fixed.
There are awkward uncertainties. The Competition and Markets Authority is scheduled to report next month on remedies to make the retail gas market more competitive. One possibility is the forced introduction of a so-called safeguard tariff to protect consumers too trusting, ignorant or idle to switch from being fleeced. British Gas has half a million such customers.
After yesterday’s 5½p rise in the share price to 211½p, the company trades on an inexpensive 12 times prospective full-year earnings and yields 5.7 per cent. Short of a serious further leg downwards in wholesale gas prices — which is not impossible by any means — the company looks well placed.
The 650,000 small shareholders who have stuck with the company since the British Gas privatisation 29 years ago should not capitulate now.
Indeed, they should be bold. This looks a good moment to top up holdings.
Prospective earnings17.7p
Yield 5.7%
MY ADVICE Buy
WHY Inexpensive, nicely yielding lower-risk ballast for any portfolio
The 11 per cent markdown of the Sports Direct International share price yesterday demonstrates how this most singular of companies is going to be punished by the stock market for any stumble. There are so many red flags raised about the governance and behaviour of SDI that nothing but perfect financial performance is acceptable.
The first-half figures were OK, but far from perfect. Sales are flat. Underlying profits growth is slowing and below expectations. There is a big question mark over the cookie-cutter approach to expansion in continental Europe: Austria is proving a disaster, for example. Quite how bad things are is impossible to tell because the company refuses to break out its overseas numbers.
In the UK, the business model seems too reliant on 2,000 middle managers incentivised by a generous bonus scheme squeezing every last ounce out of 12,000 or so casuals on zero-hours contracts. Allegations of hectoring management methods and grisly working conditions at the Shirebrook warehouse add to evidence that SDI sometimes sails close to the wind.
Some companies can be hated yet still thrive — Ryanair, for example. Some can’t — Wonga, for example.
Given this risk and SDI’s other curiosities — such as using shareholder money to take bets on rival retailers’ share prices — you’d expect there to be a huge “Ashley discount”. But even after yesterday’s fall the shares trade on 15 times expected earnings this year. There’s no dividend. We warned a year ago that the shares were too dear at 666p. Now at 592½p, they are still too dear.
Sales £1.4bn
Profit £166m
MY ADVICE Sell
WHY Too many red flags for the price
Tim Steiner is a brilliant retailer. Ask him, he’ll tell you. While he is a genuinely clever bloke who has created a business that is excellent in many ways, the Ocado chief is still about jam tomorrow.
The date on which the jam arrives gets put back ever further. That’s because the prospects for the business are growing as its potential expands, or else it is taking much longer than expected to make anything approaching a proper profit.
Even after a near-7 per cent plunge in the share price to 335¾p yesterday, the company is still valued at getting on for £2 billion. For a business that should make profits of £13 million this year, that’s steep. J Sainsbury made profits of more than £300 million in the past six months alone, and it’s valued at less than £5 billion.
So the Ocado market capitalisation assumes amazing things coming down the line — that it becomes the Amazon of the grocery world, and that Amazon itself doesn’t become the Amazon of the grocery world.
Sales in the 16 weeks to November 29 rose 15 per cent to £381.6 million, which looks good. For the shares to be worth a punt, those sales have to become profitable.
That looks as long off as ever. We wish Ocado well. And advise you to avoid the shares.
Orders 0.2m/wk
Avg order £107
MY ADVICE Avoid
WHY True profits look as far off as ever
And finally
Once upon a time Mulberry was going to be the next Burberry. It got ideas above its station, massively overcharged for what in the end are only handbags, and crashed to earth.
The Paris terror attacks have put visitors off its French stores in the latest blow to sales.
The shares were £23.90 in May 2012, a peak that seems unlikely to be reached again. They closed at 928¾p last night, valuing the business at £562 million.
Buy the new cheaper handbags if you wish. Not the shares, though.
