Monthly Archives: November 2016

Stocks in Focus: Centrica

This week I am focussing on Centrica, the largest energy provider in the UK.  In recent years the government has piled pressure on the UK’s “big six” suppliers in an attempt to keep consumer energy prices low.  However the collapse of a small competitor GB Energy has led to analysts warning that dozens more small companies could struggle, easing competition pressures on the major suppliers.

Centrica is predominantly involved in the production of gas and supply of gas and electricity to UK households.  The largest division is the well-known British Gas.  Centrica has been under pressure over the last couple of years due to a combination of increased competition in the sector and the fall in oil and gas prices, with the price of oil hitting a 12 year low in January.  This has been compounded with government pressure to keep energy costs down.

The government has encouraged the entry of small power suppliers as a way of increasing pricing pressure on the big six.  However rising energy costs, exaggerated by the fall of Sterling post the referendum, have driven up costs for these small businesses.  Unable to weather the storm of these price increases GB Energy’s business has become untenable.  Analysts are expecting more of these small companies to follow, which should ease pricing pressure.

Centrica’s size and vertical integration have allowed it to withstand the energy price increases.  The fact that they are also a producer of gas and have the financial capability to hedge short term fluctuations in the energy prices allow them to smooth the impact of volatility in the energy prices.  With less pricing pressure the company will eventually pass any additional costs on to clients and with reduced competition they may regain lost market share.  However there remains the on-going risk of increased regulatory pressure on the ability of large energy companies to grow profits.

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Stocks in Focus: GKN

This week I am looking at GKN, following its third quarter update announced last week.  The engineering firm published positive numbers, with sales up 21% helped by the acquisition of Fokker Technologies last year. However, it also warned that slowing growth rates in automotive and aerospace would curb the group’s overall growth.

GKN’s business is split into four divisions: Aerospace, Driveline, Powder Metallurgy and Land Systems.  Aerospace and Driveline (which supplies driveline technology to the automotive industry) are the biggest parts to GKN’s business and represent 78% of sales.  During the recent announcement chief executive Nigel Stein said that global demand for light vehicles is expected to fall to 1% growth for the last three months of the year, compared with previous expectations of 2% growth.  At the same time aircraft manufacturers are also expected to face slower growth and are facing delays in production.

Despite the cautious outlook for two of GKN’s major sectors, management are not adjusting their earnings expectations.  Margins were slightly down due to the impact of restructuring costs, but the company has benefitted from a currency headwind.  Over the first nine months of the year organic sales grew in the aerospace business by 2%.

Management are confident that, even though the aerospace and automotive industries are going to be growing at a slower rate, they will continue to be able outperform the general sectors.  Over the nine months to 30 September, for example, GKN’s sales to the automotive industry grew 6% compared with an industry average of 4%. This is a good indication that the business has a strong competitive position compared to its competitors, although interest in the shares may remain muted whilst the outlook is cautious.

http://www.nwbrown.co.uk/library/