UK Edition
Questor: buy Centrica – the shares are back at 2005 levels and dividend yield is almost 6pc
After a testing three-year spell characterised by profit warnings, dividend cuts and pressure on prices from the public and regulator alike, Centrica may seem an unlikely candidate for inclusion in your portfolio.
But the shares are now trading at levels last seen in 2005 and the valuation looks interesting relative to the company’s history, so it may not take much of a shift in sentiment or operational performance for the energy giant to return to favour.
A meeting with analysts last week looked like a step in the right direction. A plan to sell power plants and some oil exploration and production assets means Centrica is raising cash and reducing its capital expenditure.
This brings two possible benefits. First, the firm is refocusing its operations, as the money received from the disposals will be reinvested in its energy supply operations, and advanced home and energy management services such as Hive.
Second, cashflow should improve, to the benefit of the dividend. Centrica is targeting a 3pc-5pc annual improvement in free cashflow and it is cash that funds the precious payment to investors. An unchanged dividend of 12p a share equates to a yield of 5.8pc, and improved earnings and cashflow cover could make that look tempting to income seekers.
Question marks remain, not least the regulatory environment. Theresa May appears to have abandoned plans for the Government to impose price caps directly, as the Queen’s Speech placed the burden back on Ofgem, the regulator.
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Capital at risk.
It would nevertheless be unwise to assume that the threat has gone away, as a newly confident Labour remains in favour of a more interventionist policy. But at least the company has the chance to prove its case that its bundled offers provide the best value for customers and, again, the lowly valuation at least already partially reflects this particular danger.
Questor says: buy
Ticker: CNA
Share price at close: 209p
Update: Hurricane Energy
In our initial analysis of Hurricane Energy at 42p in December, we described the Shetland-based oil explorer as being unsuitable for widows and orphans, or risk-averse investors, and hopefully any readers who fitted any of those descriptions took heed.
A 57pc paper profit as of early May has become a 15pc paper loss, as the shares have almost halved in barely a month, showing just why Aim stocks, and small oil explorers in particular, cannot be left unwatched.
Remember that Aim accounts for barely 3pc of UK plc’s market capitalisation, so any portfolio that has greater exposure is taking on above-average risk, which may not suit your strategy or circumstances.
An unexpected scheme to issue warrants to raise nearly £13m appears to have put a few noses out of joint, given how the shares have performed since, while a fresh slump in the oil price has not helped matters.
Initial drilling results suggest that the firm’s Lancaster and Halifax fields are packed with potential but the company is now at the stage where it needs to provide clarity on how it intends to finance exploration and – oil price notwithstanding – until that comes the shares could remain tempest-tossed.
Questor says: hold
Ticker: HUR
Share price at close: 35.75p
Update: Sky
It is now crunch time for the £11.7bn bid from 21st Century Fox for Sky. Karen Bradley, the Culture Secretary, is studying the views of Ofcom, the regulator, on whether the deal should be approved and will reportedly make her opinions known by Thursday at the latest.
Investors are clearly nervous that the deal will be blocked as Sky is still trading below the £10.75 offered for each share by the US-quoted Murdoch vehicle. Once the minister has her say there is scope for further representations before the final decision.
Our initial look at Sky last Octoberis still showing a profit of almost 8pc. A successful bid would bring short-term returns but even if it fails the underlying business still looks interesting thanks to its cashflow.
Questor says: buy
Ticker: SKY
Share price at close: 970p
Russ Mould is investment director at AJ Bell, the stockbroker