ii view: new high for SSE shares after upgrading profit estimates

A major investment programme in renewable energy assets and an estimated future dividend yield of around 5%. Buy, sell, or hold?

Fourth-quarter and full-year trading update to 31 March

Finance Director Gregor Alexander said:

"SSE's integrated and balanced business model has performed well in turbulent market conditions, with expected financial performance now broadly aligning with our internal projections at the beginning of the year.”

ii round-up:

Renewable power generator SSE (LSE:SSE) today raised its earnings expectation as recent changes in the weather increased its renewable energy production. 

A good performance from its flexible gas thermal and hydro plants added to energy output for the fourth-quarter, allowing it to again upgrade full-year guidance. Earnings are now expected to come in at between 92p and 97p per share, up from "at least 90p" as of its third-quarter update. 

SSE shares rose around 1% in UK trading to a record high, leaving them up by around 3% year-to-date. Shares for electricity and gas transmission company National Grid (LSE:NG.) have gained by more than 7% in that time. The FTSE 100 index is up by just over 2%. 

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The Perth, Scotland headquartered utility reiterated previously detailed dividend plans. A total full-year payment of 81p plus inflation is scheduled for this financial year, followed by an inflation linked dividend during the next financial year of 2022/23. After that, a debasement to a total of 60p per share will be made from 2023/2024 followed by at least 5% increases in 2024/25 and 2025/26.

SSE remains on track to spend and invest in excess of £2 billion for this financial year. In November, it outlined an additional investment of £12.5 billion up until 2026 in its renewable energy assets, the funding of which requires the now scheduled cutting or rebasing of the dividend. 

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Group net debt is expected to be below £9 billion as of the 31 March year-end having recently received £1.3 billion from its share stake sale in Scotia Gas Networks (SGN). 

Management highlighted that the war in Ukraine has had significant consequences for energy markets and policy, contributing to historically high and volatile prices. However, SSE had so far been well served by its prudent hedging approach, with its £12.5 billion green energy investment programme now helping to reduce reliance on imported gas.

Annual results are scheduled for 25 May. 

ii view:

Scottish & Southern Energy (SSE) was formed via the merger of Southern Electric and Scottish Hydro Electric. Today it 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. New windfarm construction is ongoing with operations overseas also expanding. 

For investors, annual renewable energy production 12% below management’s start of the year forecast underlines its vulnerability to the weather. An upping of renewable asset investment requires a scheduled rebasing of the dividend going forward, while oil majors such as BP (LSE:BP.), Shell (LSE:SHEL) and TotalEnergies SE (EURONEXT:TTE) have all refocused on renewable energy sources, adding competition and potential price to the possible purchase of any new assets. 

But SSE remains the UK’s biggest renewable energy generator, with plans to invest and expand. The diversity of its operations is helping to balance out the volatility of its renewable output, while the shares sit on a forward dividend yield of around 5%, highly attractive in the current low interest rate environment. In all, and given both climate change credentials and an attractive dividend yield, SSE appears to remain deserving 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