ii view: a move into Japan offsets light winds at SSE

Expanding renewable overseas operations and a dividend yield of around 5%. Buy, sell, or hold? 

First-half trading update to 30 September 2021

• Renewable output down 32%
• Expecting first-half adjusted earnings per share of between 7.5p and 10p
• Entering the Japanese offshore wind market via a joint venture with Pacifico Energy
• Expects to pay an interim dividend of 25.3p per share 

Finance Director Gregor Alexander said:

"SSE's very deliberate mix of economically regulated and market-based businesses provides resilience against seasonal variability. The successful reshaping of the Group through our disposals programme has sharpened the focus on our core renewables and electricity networks businesses.

"We look forward to updating the market with an ambitious new investment plan that will optimise the SSE Group's options and opportunities in the transition to net zero.”

ii round-up:

Power generator and network operator SSE (LSE:SSE) today reported a near one-third fall in first-half energy production as light winds and low rainfall hindered renewable output.

The UK’s biggest renewable energy generator also announced a $208 million (£152 million) move into the Japanese offshore wind market via a joint venture with Pacifico Energy. This adds to its growing list of operations in Spain, Portugal, Denmark, Poland, and the US. 

SSE shares were little changed in UK trading, having gained by close to 50% since pandemic induced market lows in March 2020. SSE hopes to triple its renewable energy production by 2030. National Grid (LSE:NG.) shares are up by around 12% over that time while British Gas owner Centrica (LSE:CNA) is up around 40%. 

The fall in weather-hit renewable first-half production is expected to result in an 11% shortfall on SSE's forecast total output for the full year. Management flagged the time-limited nature of the production fall and that its key winter months were yet to come. It remains confident in delivering a solid full-year financial performance.

Based on inflation of 3.75%, it expects to pay an interim dividend for the period of 25.3p per share in March 2022. That’s up from last year’s 24.4p per share. 

SSE reaffirmed its previous response to speculation regarding a split of its business, with no such decision by the board taken. It remains focused on strategic choices which will drive shareholder value from the wealth of net zero climate change opportunities it is creating.

As detailed in May, management will provide an update on its plans to further accelerate growth in its portfolio as of its 17 November first-half results, including details of significantly increased capital investment for the period to 2026. 

ii view:

SSE operates both regulated UK energy networks, accounting for around half of its earnings, and renewable generation making up most of the balance. Around 10% still comes from non-renewable generation, energy supply and other related energy services. The company is now the UK’s biggest renewable energy generator with investment and new windfarm construction ongoing. Operations overseas also continue to grow. 

For investors, pandemic disruption is now added to the more usual bad weather disruption which SSE is vulnerable to. The refocusing of the oil majors such as BP (LSE:BP.), Shell (LSE:RDSB) and Total (EURONEXT:TTE) on renewable energy sources also adds to the competition and potentially price of buying any new assets. 

But SSE has been early to adopt renewable energy generation. Its assets now growing via a major investment programme, and one which will soon likely be added too. Activist investors are also reportedly pressuring SSE for a breakup of the firm. A historic and estimated forward dividend yield of just over 5% is also tough to ignore in an era of ultra-low interest rates. In all, and given its strong green credentials and still highly attractive dividend return, SSE looks to remain worthy of ongoing investor support.     

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