Interactive Investor

ii view: renewable energy play SSE’s update reassures

Investing billions in wind farms and with aspirations to triple renewable energy output by 2030. Buy, sell, or hold?

27th March 2024 11:13

Keith Bowman from interactive investor

Full-year trading update to 31 March

ii round-up:

Renewable and gas-powered energy provider SSE (LSE:SSE) today offered broad reassurance in a trading update ahead of its full-year results due on 22 May.

Adjusted earnings per share for the year to 31 March are now expected to come in at between 152p and 160p against a prior forecast of over 150p, so on track to  potentially meet City estimates of 157p. 

Shares in the FTSE 100 utility rose 1% in UK trading having come into this latest news down by just over a tenth year-to-date. That’s similar to British Gas owner Centrica (LSE:CNA), worse than the 1% decline at National Grid (LSE:NG.) and below a 2% gain for the FTSE 100 index itself. 

SSE operates traditional gas fired power plants as well as renewable energy operations including a growing number of wind generation farms such as its Seagreen operation off the coast of Scotland. 

Management continues to expect output and profit of more than £750 million for its gas thermal operations, which should counter what is now a 13% shortfall in renewable energy generation but improved from a previous 15% deficit.

The Perth, Scotland headquartered company also reaffirmed its forecast to achieve adjusted earnings of between 175p and 200p per share come the financial year 2026/2027, as it continues to invest in net zero climate operations and including £2.5 billion for this latest financial year just ending. 

Group net debt as of 31 March is expected to be around £9.5 billion, below City estimates of £9.7 billion, with SSE potentially having invested a total of £40 billion in its renewable and other operations come 2032. 

Broker Morgan Stanley reaffirmed its ‘overweight’ stance on the shares post the update, highlighting SSE as a ‘top pick.’

ii view:

SSE operates a mix of transmission networks, renewable energy operations such as its still under construction Dogger Bank wind farm in the North Sea and flexible thermal power generation plants. To contribute towards its significant net zero investment plans, it previously announced the rebasing of the dividend for this current financial year to a total of 60p per share from last year’s 96.7p per share, with dividend increases thereafter of at least 5% per annum targeted up to 2027. 

For investors, renewable energy production such as wind power is vulnerable to the weather, and regulatory reviews remain a constant. Competition in the renewable field has increased as oil giants such as BP (LSE:BP.), Shell (LSE:SHEL) and TotalEnergies SE (EURONEXT:TTE) have entered the arena, while the rebasing of its dividend payment sees the historical yield falling from 5.5% to a figure nearer 3.7% at the current share price.  

More favourably, SSE's ambition includes delivering over a fifth of the networks and offshore wind investments required to meet the UK’s climate change targets, with its Dogger Bank operation expected to generate 3.6 gigawatts once fully operational, enough to power around six million UK homes. A diverse portfolio of generating assets is held, moves overseas have been made including Denmark and Spain, while there are plans to increase the dividend exist following the rebasing.  

On balance, and with concerns about global warning not going away and the consensus analyst estimate of fair value at close to £21 per share, this major UK utility remains of interest to investors. 

Positives

  • Expanding asset base
  • Diversity of operations

Negatives

  • Subject to regulatory rulings
  • Previous target of government windfall tax  

The average rating of stock market analysts:

Buy

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