Not so long ago, utilities were the workhorses of the stock market. Selling water, gas and electricity may not have been the stuff of unicorn dreams, but it was solid, sturdy activity — and the source of dependable dividends for investors.
The days of plenty are fast fading from memory, however. Consider Centrica. Over the past three years, the owner of British Gas has lost half its market value. Over-zealous regulation, rising competition and a plummeting oil price have conspired to shred its share price. The spectre of an energy price cap has merely compounded the agony.
Yet Iain Conn, the BP veteran who took the helm at the start of 2015, has even knottier problems to solve. The energy business is in a state of flux. Technology — from cheap solar panels to internet-connected thermostats — threatens to crush profits.
Two years ago, Conn set out a bold survival plan. Early on Wednesday, he will tell City investors how he’s getting along. Hours later, in the Queen’s speech, we’ll discover whether Theresa May will make good on her promise to force energy bills lower. A momentous day awaits.
Conn’s overhaul has two main components. First, he is investing heavily in more flexible power generation. Centrica is building a large battery facility at the former Roosecote power station, in Barrow-in-Furness, to store energy from cleaner sources. It is also investing in smaller, more nimble gas plants, which can be switched on and off as demand dictates.
Second, Conn has placed a big bet on the “connected home” — where consumers can manage their energy use more efficiently. British Gas’s Hive home hub lets users control their heating, lights and plugs by smartphone. So far, 600,000 customers have signed up , and it has recently been launched in America. Another initiative is the Local Heroes website, which connects customers to tradesmen.
Despite the political sabre rattling, Centrica and its rivals do not reap outsized rewards. Over the long term, their profit margins are set to drift lower as households generate their own electricity from solar panels. If Conn can persuade customers to buy more consumer services, his margins should grow again.
The question is whether Centrica’s new initiatives can expand fast enough to offset the slump in its traditional business. Conn has at least set the company on a more profitable path. After such a calamitous price fall, Centrica shares are worth a look. Buy.
