ii view: green investor SSE could be windfall tax target

Shares in this utility giant currently offer an estimated dividend yield of over 5%. Buy, sell, or hold? 

First-half results to 30 September

• Adjusted earnings per share up 298% to 41.8p 
• Interim dividend up 13.7% to 29p per share
• Net debt up 4% to £10 billion

Guidance:

• Continues to expect full-year adjusted earnings of at least 120p per share

Chief executive Alistair Phillips-Davies said:

"One year on and despite unprecedented volatility in the operating environment, our Net Zero Acceleration Programme has never been more relevant to society. This direct investment primarily in offshore wind, UK electricity networks and flexible thermal will create the technologies to support long-term energy security.

“Our business model and strategy are delivering for our stakeholders today, whilst creating future long-term societal value."

ii round-up:

Renewable energy provider SSE (LSE:SSE) today underlined its ongoing investment in renewable energy as speculation regarding the possible introduction of a windfall tax continued to swirl ahead of the government's Autumn Statement tomorrow. 

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First-half adjusted earnings for the Perth headquartered company rose sharply year-over-year, aided by rising energy prices following the war in Ukraine and demand for its gas storage operations. 

SSE shares drifted around 1% lower in UK trading having come into this latest update little changed year-to-date. National Grid (LSE:NG.) is down around 5% in 2022, similar to the FTSE-All share index, while Utility Warehouse brand owner Telecom Plus (LSE:TEP) is up 40% year-to-date as consumers search for more competitive energy suppliers. 

SSE continues to pursue a £12.5 billion five-year investment programme into green energy projects such as wind farms off the coast of Scotland. Investment during the full year to the end of March is expected to be in excess of £2.5 billion. 

Adjusted earnings for the six months to the end of September rose to 41.8p per share, up from 10.5p per share in H1 2021, buoyed by its more traditional gas-powered generation plants, but hindered by delays in the build-out of its Scottish Seagreen offshore wind project. A pre-tax profit of £559.4 million compares with £174.2 million this time last year.

The interim dividend of 29p per share is pushed higher by inflation and compares to a payment of 25.5p this time last year. Given its investment programme, the dividend from 2023/2024 will be rebased down to 60p for the full year compared to a forecast 93.4p for this current year. 

SSE reiterated its expectation for current full-year adjusted earnings to hit at least 120p per share, up from 90.2p a year ago. 

Broker Morgan Stanley reaffirmed its ‘overweight’ stance on the shares following the results, believing that the continued building of its renewable plant remains encouraging for SSE’s longer-term growth. 

ii view:

Scottish & Southern Energy (SSE) was formed via the merger of Southern Electric and Scottish Hydro Electric. It is the UK's largest renewable generator with around a 4-Gigawatt portfolio and plans to triple renewable output by 2030. Its scheduled cut, or debasement of the annual dividend payment total to 60p per share during 2023/2024 will be followed by increases of at least 5% in 2024/25 and 2025/26.

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For investors, speculation that a windfall tax could be extended from oil companies such as BP (LSE:BP.) and Shell (LSE:SHEL) to power generators like SSE cannot be ignored. Renewable energy production such as wind power is also vulnerable to the weather, making output unpredictable. SSE is subject to regulatory reviews, while a scheduled rebasing of the dividend will take the forecast yield down to below 4% at the current share price.  

On the upside, a major investment programme continues, with management stressing that investment levels comfortably exceed profits being made. It remains the UK’s biggest renewable energy generator, with the diversity of its operations helping to balance out the volatility of its renewable output, while the shares currently sit on a forward dividend yield of over 5%. 

On balance, and while SSE is a solid business with positive climate change credentials, investors should bear in mind a potential energy windfall tax. We'll know more tomorrow.

Positives

• Expanding renewable clean energy
• Attractive dividend payment (not guaranteed)

Negatives

• Subject to regulatory rulings
• Growing renewable energy competition  

The average rating of stock market analysts:

Buy