Interactive Investor

ii view: SSE beats City hopes and stays focused on energy investments

The UK's largest renewable power generator with aspirations to triple renewable output by 2030. Buy, sell, or hold?

15th November 2023 11:36

by Keith Bowman from interactive investor

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First-half results to 30 September

  • Adjusted operating profit down 3% to £693 million
  • Adjusted earnings per down 11% to 37p per share 
  • Net debt down 11% to £8.9 billion
  • Interim dividend of 20p per share, down from 29p

Guidance:

  • Continues to expect full-year adjusted earnings per share of more than 150p

Chief executive Alistair Phillips-Davies said:

“Our performance in the first half of 2023/24 demonstrates SSE's well-balanced business mix and our ability to adapt and create value while maintaining capital discipline in a fast-evolving energy landscape.”

ii round-up:

Energy provider SSE (LSE:SSE) today detailed first-half earnings ahead of City forecasts, aided by operational strength at its traditional power generation plants and lower than anticipated tax. 

Adjusted earnings of 37p per share exceeded analyst forecasts for 32p, with outlook guidance reaffirmed and the interim dividend, as previously flagged, rebased to 20p per share from last year’s 29p a share given the ongoing focus on renewable energy investments. 

Shares in the FTSE 100 utility rose by more than 2% in UK trading having come into this latest news little changed year-to-date. That’s similar to shares of National Grid (LSE:NG.) and the FTSE 100 index itself, although way below a 55% increase for British Gas owner Centrica (LSE:CNA)

SSE operates traditional gas fired power plants as well as renewable energy operations including a growing number of wind generation farms. Its Seagreen wind farm off the coast of Scotland is now fully operational, with first power for its North Sea Dogger Bank farm recently generated. 

SSE investment in its assets including low-carbon renewables could total £40 billion by 2032, with management today increasing its five-year plan to 2027 by £2.5 billion to £20.5 billion.  

The rebasing of the dividend this current financial year to a total of 60p per share, compared with last year’s 96.7p, is being made to support its investment spend, with dividend increases thereafter of at least 5% per annum up to 2027. 

Broker Morgan Stanley reaffirmed its ‘overweight’ stance on the shares following the results, with SSE remaining one of its ‘top picks.’ A third-quarter trading update is scheduled for 31 January. 

ii view:

Scottish & Southern Energy (SSE) was formed via the merger of Southern Electric and Scottish Hydro Electric. Today it operates a mix of transmission networks, renewable energy plant and flexible thermal generation. Its energy projects and investments include the world's largest offshore wind farm at Dogger Bank in the North Sea. Once fully operational it is expected to generate 3.6 gigawatt (GW) of power, enough to power around six million UK homes.

For investors, renewable energy production such as wind power is vulnerable to the weather, and the industry must contend with a cycle of regulatory reviews. 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 space, while SSE has confirmed a cut to the dividend payment this financial year, lowering the historical yield from 5.5% to 3.4% at the current share price.  

On the upside, SSE's ambitions include delivering over a fifth of the network and offshore wind investments required to meet the UK’s climate change targets. A diverse portfolio of generating assets is held, moves overseas are being made, while dividend increases of between 5% and 10% per annum after this current financial year are now being targeted up to 2027.  

In all, with worries regarding global climate change not going away and the consensus analyst estimate of fair value sat at £21 per share, scope for longer-term hope appears to remain. 

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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