Energy | United Kingdom
WSD Target Price
Annualized Return Since Publication
Target Equity Value (Δ)
Source: Bloomberg end of day market data; not adjusted for dividends (January 17, 2018).
Returns assume a long investment position on the date that WSD Capital Management published its thesis, and an exit on the date that the WSD Target Price is realized.
Returns do not reflect any fees, expenses or taxes.
The returns are hypothetical and do not reflect the actual results of WSD Capital Management’s investment activities, nor is it necessarily indicative of future results of WSD Capital Management’s investment activities.
Centrica (“Centrica”) is Britain’s biggest household energy supplier and an integrated energy company that offers a wide range of home and business energy solutions, including sourcing, generating, processing, storing, trading, and supplying energy and providing related services.
WSD Capital Management announced its investment in Centrica in January 2018. A surprise slump in Centrica’s North America business helped send the utility’s shares down the most in 18 years. That adds to a 60 percent drop since 2013. Separately, the utility’s U.K. energy business lost more than 800,000 customer accounts in the four months through October, after shedding 750,000 in the first half of 2017. We believe that the Centrica’s management credibility with investors is now at an all-time-low.
Centrica is weighed down by investor skepticism over management’s strategy and the political turmoil plaguing U.K. energy suppliers as government intervention has become increasingly likely. Moreover, to cap it all, the utility has discovered billing errors dating back four years. Taking all the bad news together, Centrica says it is possible that earnings do not fully cover its dividend at some point.
While it may be some time before the market regains its confidence in Centrica’s outlook, we believe that the worst-case scenario for price caps, margin compression, and a potential 25 percent dividend cut is now fully priced in. The prospect of a strain on the dividend is already raising the utility’s borrowing costs as it pushes the dividend yield above 8 percent.
In the short term, polar currents bringing Arctic weather conditions to Britain are expected to have an impact on energy consumption that could soften some of the negative investor sentiment in Q1 2018. We expect investor confidence to be tested as the need for drastic changes continues to gain momentum, which ultimately could be favorable to long-term value investors as the likelihood of a takeover bid increases.