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CHANGES to Ofgem's price cap will mean a steep rise in energy bills for millions of households this year, but there is a way you can ease the energy hike burden. And even profit from it.
While everyone was panicking about how much our household energy bills are going up by, investors in British Gas owner Centrica (CNA) were quietly watching their shareholdings rise in value.
The Centrica share price rose 1% to 77p as soon as news broke of the rise to the energy price cap. They are currently trading around 50% higher than they were this time last year and analysts believe they have further to go. Please remember past performance is not a reliable indicator of future returns.
British Gas is still the dominant provider of residential gas and electricity in the UK, with a market share of around 27% and 20%, respectively. And this potential for profit has not passed market watchers by.
The seven firms that have analysts following the stock currently all rate Centrica’s shares a buy, with the average 12-month price target now 93p.
Most recently Morgan Stanley reiterated its "overweight" rating on Centrica and Barclays, which has also reissued its "overweight" rating has a 112p target on the shares. Citigroup isn’t far behind on 100p.
Centrica is widely held by UK retail investors. It has lost 70% of its value in the past five years, but has seen its share price recover strongly in the past year as gas prices have hit new highs.
However, that is not to say that Centrica does not have issues to contend with. Although Centrica’s dominant position in the UK residential energy market is one of its strengths, the industry price cap still means profits will remain under pressure for the foreseeable future. And it has already been forced to take in large numbers of customers from smaller energy firms under a UK scheme that protects customers if their energy provider collapses.
Let’s not forget too that we depend on Russian supplies to meet energy demand. So the political crisis with Ukraine is another worry for Centrica.
And then there is also the prospect of activist investor action. Centrica is understood to be making contingency plans, after large stakes worth hundreds of millions of pounds changed hands through accounts fronted by investment banks about a month ago. The combination of shares and contracts for differences set alarm bells ringing, as it’s a standard tactic used by investors planning to demand change. As Britain’s largest household energy supplier, British Gas will have a key role in the shift towards cleaner energy.
These have been tough times for Centrica’s chief executive, Chris O’Shea, who only took the helm in March 2020. He has already cut 5,000 jobs to ease costs and sold off Centrica’s US business Direct Energy for almost £3 billion to help pay down debt. He wants to streamline the company to focus on selling energy and related products and services to households, so expect more on that when results are announced.
Centrica’s full-year results are due out on Thursday 24 February.
More on Centrica
Five year performance
(%) As at 14 Feb
Past performance is not a reliable indicator of future returns
Source: FE, total returns as at 14.2.22
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