Fair Value After the Fall

Centrica PLC — the UK utilities group behind British Gas and Bord Gáis: energy supply, trading and infrastructure, with oil and gas production. All figures in pounds sterling.

Under retail, home energy supply is British Gas and Bord Gáis — the two main brands — supplying electricity and gas to homes across the UK and Ireland. The services division provides installation, repair and maintenance of heating, plumbing and electrical appliances through those brands and Dyno-Rod, plus PH Jones; and under services sit Hive smart thermostats, EV chargers, heat pumps and rooftop solar.

Centrica Energy is the gas and power trading arm: 29 markets, 19 gas hubs across Europe and the US, an LNG (liquefied natural gas) trading business delivering cargoes worldwide, long-term ship charters and physical and financial trading, plus a renewable energy trading and optimisation book (biomethane portfolios and similar — a balancing activity rather than a large profit centre in its own right).

Under infrastructure, the power division owns and operates generation — including the 20% share in the UK nuclear fleet, Whitegate power station in Ireland and a number of battery sites — and the gas section produces, stores and transports natural gas: Spirit Energy, the Rough storage facility, the Morecambe hub, and the Grain LNG regasification terminal acquired from National Grid last year.

Back in 2023 their post-tax profit of £4.04bn would make today's share price look very cheap — but it is hardly worth much when they are losing money as they currently are! Since hitting a share-price high on 7 April, the shares have fallen dramatically — down around 24% between 7 April and early July. Market capitalisation currently sits at around £7.7bn.

Six-year financial history

Revenues have swung dramatically: £14.7bn (2021), up 61% to £23.7bn (2022), up again 11.4% to £26.5bn (2023), then down −24.7% to £19.9bn (2024) and a further −2.1% to £19.5bn (2025). The reason behind these dramatic revenue swings is energy prices.

The 2022–23 surge in revenues was caused by the energy crisis (wholesale gas up several-fold, and the Ofgem retail price cap — which British Gas tariffs track — more than doubling), and the 2024 collapse was the same in reverse as wholesale prices normalised and the price cap stepped down through the year. Volumes did not move much; prices did.

There have been disposals — Spirit Energy's Norwegian assets went in 2022, a second Spirit divestment is expected to complete around mid-2026, and £238m of assets sat in "held for sale" at the 2025 year-end — but these are not what moved a £26bn revenue line down to £19bn. That was commodity prices. (The earlier step-change down in 2020–21 does have a disposal element: the sale of the North American Direct Energy business completed in January 2021.)

Gross margins ran 25.5% (2020), 11.0% (2021), 8.6% (2022), 36.4% (2023), 20.5% (2024) and 14.5% (2025) — seemingly random. The main culprit is accounting, not trading: the statutory gross profit line includes IFRS re-measurement of derivative energy contracts, which swings enormously with forward energy prices.

In the crisis year of 2022, huge mark-to-market losses on hedges shrunk statutory gross margin to 8.6% even as the underlying business boomed; in 2023 those re-measurements reversed, inflating gross margin to 36.4% and pre-tax profit to £7.7bn. The underlying (business performance) margins are far steadier than the statutory line suggests.

During the past 12 months turnover barely moved — down only −2.1% — but gross profit fell −30.7% to £2,831m, and group operating profit including joint ventures and associates collapsed 93.8%, from £1,703m to just £106m. Three items did this damage:

What drove the collapse in statutory operating profit

First, the underlying business genuinely weakened: adjusted operating profit nearly halved (£1,552m to £814m), led by the trading arm (more below). Second, the exceptional items and re-measurements column went from adding £151m in 2024 to subtracting £708m in 2025 — an £859m adverse swing, containing £519m of impairments and £405m of exceptional costs. The FY release describes a £0.7bn net loss on derivative re-measurements and exceptionals, including £0.5bn of impairments. Third: joint ventures and associates.

The joint ventures and associates question. This is principally Centrica's 20% stake in the UK's operating nuclear fleet (held through the EDF joint venture), and it fell because of nuclear outages and lower achieved power prices. The balance sheet indicates that interests in JVs and associates rose 47.5% to £1,171m, because Centrica put £609m into Sizewell C during the year. So the JV line is set to become more important, not less — it just earned less in 2025.

Centrica has just re-segmented into three reportable divisions — Retail, Optimisation (the old Centrica Energy trading arm plus equivalent Bord Gáis activities) and Infrastructure (Power, Gas and Customer Assets) — and moved its guidance onto an adjusted EBITDA basis (earnings before interest, tax, depreciation and amortisation). The FY2025 picture:

Segment adjusted EBITDA, FY2025 vs FY2024

On the old basis, group adjusted operating profit was £814m (2024: £1,552m); Centrica Energy's operating profit of £150m came in below its previous medium-term range, while Bord Gáis plus business energy supply delivered £200m at the top of theirs. For 2026 the company guides Retail EBITDA of £500–800m, Optimisation around £250m (below its £300–400m range — flagging a softer trading backdrop), Infrastructure £500–650m, and capital investment of at least £0.7bn. So the near-term earnings mix is roughly £1.4bn of EBITDA again, with the growth story resting on the investment programme.

On 18 May 2026 Centrica announced the acquisition of the Severn CCGT (combined-cycle gas turbine) power station for around £370m, adding flexible generation. Buybacks have been paused to prioritise investment — the £2bn programme that reduced the share count by a quarter is complete, and capital is now going into assets. The chief executive, Chris O'Shea, highlights the purchase of Grain LNG, a £20bn deal signed with Equinor securing 5 billion cubic metres of gas a year until 2035, and £1.3bn committed into Sizewell C.

On performance, he concedes that global market uncertainty hit Centrica Energy harder than expected, and that unseasonably warm weather plus higher bad debt put pressure on the supply business. The narrative is that performance has been "resilient given the market"; my feeling is that in these updates they are talking too much about satisfying customers and not enough about why they are losing money. He does highlight that technology and AI are driving up electricity demand like never before — the company's own projection is for GB electricity demand to rise 43% in the coming years.

However, this statement is hugely misleading! This 43% rise was between 2025 and 2040 — 15 years! Which amounts to really 2.86% annually.

Shares in issue have come down considerably — a 22.5% reduction since 2022 — which is quite beneficial for the earnings-per-share figure, driven by the completed £2bn buyback. On the positive side, net borrowing is still negative — adjusted net cash £1,487m per the FY release — though not as strong as the last two years (£2,711m in 2024), because free cash flow turned negative (−£167m) as capital expenditure more than doubled to £1.2bn on Sizewell C, Grain LNG and the meter asset provider platform. The yield is around 3.2%, which is not especially high for a company that has seen such oscillations in profitability and turnover — though the 5.5p dividend was up 22% on the year.

As a general backdrop — and you can read this in our other articles on crude and gas prices — in the early weeks of the Iranian crisis I was much more concerned about the longer-term impacts on oil and gas prices, feeling they might hit very high levels. Against my previous expectations, the futures market now seems to be indicating that oil and gas prices are not likely to be sky-high. That is obviously a bit of a negative story for a company such as Centrica, which probably benefits significantly when prices are higher — the commodity chart above makes the relationship plain.

So where does that leave Centrica? The 2023-style windfall is not coming back on current price expectations; the trading arm has had its cash-cow years for now; and the statutory numbers will keep being whipped around by re-measurements. Against that: Retail is already delivering at its mid-term targets, the balance sheet still holds net cash, the share count is down a quarter, the dividend is growing from a low base, and the capital is being redeployed into long-duration regulated and contracted infrastructure — Sizewell C, Grain LNG, Rough, the meter assets, now Severn.

I am using an earnings-per-share override of 18.90p — a normalised figure sitting between the depressed FY2025 adjusted earnings per share of 10.9p and the FY2024 outturn of 18.5p, reflecting the 2026 guidance mix rather than the 2025 trough — with a growth rate of 2%, a valuation multiple of 8, and a 5% valuation reduction for the earnings volatility and execution risk on the investment programme. The risk factor is 17% and the probability 50%.

VALUATION SNAPSHOT

The price-to-earnings ratio shown is computed on the 18.90p normalised valuation base; on the FY2025 adjusted earnings per share of 10.9p it is 15.6x. Reported FY2025 earnings per share was negative (−1.5p), so no meaningful reported-basis ratio exists.

This gives an actual valuation of 166.62p against a current share price of 169.50p — a value opportunity of −1.7%. In other words, after the 24% fall since April, the shares are now trading almost exactly at my assessment of fair value: neither the bargain the 2023 profits might suggest, nor obviously expensive. The proposed action is a Hold.

• Commodity prices stay lower for longer: Centrica probably benefits significantly when prices are higher. If the futures market is right and oil and gas prices are not going to be sky-high, the earnings recovery leans entirely on the investment programme.
• The trading arm disappoints again: Optimisation is guided around £250m for 2026, already below its £300–400m medium-term range. Low volatility and unfavourable prices could keep it there — or below.
• Execution risk on the capital programme: Sizewell C, Grain LNG, Rough, the meter platform and now Severn all have to deliver returns; free cash flow has already turned negative (−£167m) while capital expenditure ramps.
• Warm weather and bad debt: Both pressured the supply business in 2025 and neither is within management's control.
• Statutory noise: Derivative re-measurements will keep whipping the headline numbers around, and a large adverse swing can spook the market regardless of the underlying performance.

• Higher energy prices: A sustained move up in gas and power prices — the chart makes the relationship plain — would lift both the trading arm and Infrastructure, and my normalised 18.90p base would start to look conservative.
• Optimisation recovering to its range: A return to the £300–400m medium-term band for the trading arm would materially change the earnings mix.
• The infrastructure programme paying off visibly: Evidence that Sizewell C, Grain LNG and the growing asset base are converting into durable, contracted earnings would justify a higher multiple than 8x.
• Retail outperforming its targets: Retail is already at its mid-term goals; consistent delivery at the top of the £500–800m guidance range would derisk the story.