Interactive Investor

ii view: SSE underlines benefits of diverse energy portfolio

Owning assets from the former Scottish Hydro and now investing billions in wind farms. Buy, sell, or hold?

4th October 2023 11:37

by Keith Bowman from interactive investor

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First-half trading update to 30 September

  • Expects adjusted earnings of at least 30p per share
  • Net debt of around £9 billion, up from £8.9 billion in late March

Guidance:

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

Finance Director Gregor Alexander said:

"Our strong balance sheet and financial discipline continue to allow us to progress growth options within our diversified pipeline selectively. In the long-term, there remains broad support for the accelerated build-out of secure, affordable, low-carbon electricity infrastructure - both in the UK and internationally - enabling the continued creation of shareholder and societal value."

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ii round-up:

Energy provider SSE (LSE:SSE) today reiterated full-year profit guidance as its more traditional power generation assets continued to counter a near one-fifth shortfall from its renewable assets given adverse weather conditions. 

First-half adjusted earnings to late September of at least 30p per share are expected, with the more heavily weighted winter second half still expected to push annual earnings to more than 150p per share. That’s in line with current City forecasts of 156p per share. 

Shares in the FTSE 100 utility rose marginally in UK trading having come into this latest news down around a tenth year-to-date. Both National Grid (LSE:NG.) and Severn Trent (LSE:SVT) have fallen by a similar amount during 2023, while the FTSE 100 index itself is up by less than 1%.

The first half hinderance to SSE’s renewable energy production from adverse weather leaves its full-year green energy output target 7% short of earlier management hopes. 

SSE investment in its renewable low-carbon assets is expected this year to surpass the record £2.8 billion made last year and continues under plans to invest up to £40 billion come 2032. 

Recent progress under its ‘Net Zero Acceleration Programme’ includes completing the installation of all 103 turbines across its Shetland Viking onshore wind farm, which is expected to start producing in 2024, and starting the construction of a 28 megawatt (MW) onshore wind farm in Chaintrix, France. 

SSE net debt as of 30 September is expected to come in at £9 billion, up marginally from £8.9 billion in late March. 

Broker Morgan Stanley reaffirmed its ‘overweight’ stance on the shares following the update, with SSE remaining one of its ‘top picks.’ First-half results are scheduled for 15 November. 

ii view:

Scottish & Southern Energy (SSE) was formed via the merger of Southern Electric and Scottish Hydro Electric. 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 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 regulatory reviews remain a constant consideration. Competition in the renewable field has increased following the entry from oil giants such as BP (LSE:BP.), Shell (LSE:SHEL) and TotalEnergies SE (EURONEXT:TTE), while a planned cut to the dividend this financial year, to help finance ongoing investment, will see the historical yield fall from 6% to nearer 4% at the current share price.  

On the upside, SSE's ambition includes delivering over a fifth of the networks 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 5% annual increases in the dividend are planned following its pending reduction. 

For now, and with concerns for climate change not going away and the consensus analyst estimate of fair value sat at over £21 per share, room for longer-term optimism looks to persist. 

Positives

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

Negatives

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

The average rating of stock market analysts:

Buy

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