ii view: why SSE shares just surged to six-month high

Investing in windfarms and reducing debt. We assess prospects for the UK's largest renewable generator. 

Full-year trading update to 30 March

Finance director Gregor Alexander said:

"As we progress our ambitious Net Zero Acceleration Programme, we are investing more than we make in profits into the infrastructure society needs for a more secure, affordable and clean energy system. Our balanced business model has performed well in a volatile year, helping to ensure security of supply.

" At the same time, we are progressing multiple projects and adding to our pipeline as we deliver on our net zero focused electricity infrastructure strategy.”

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ii round-up:

Energy provider SSE (LSE:SSE) today upgraded full-year earnings expectations, as output from its more traditional generation plants more than offset a decline in weather dependent renewable sources like wind. 

Adjusted earnings for the year to the end of March are now expected to come in at over 160p per share, up from a previous estimate of over 150p per share. The news came on the same day as the government detailed new plans to grow climate friendly production and secure output in the wake of Russia’s invasion of Ukraine. 

Shares in FTSE 100 listed SSE rose by more than 2% in UK trading having come into this latest news little changed over the last year. That compares to falls of 9% and 29% for fellow energy related companies National Grid (LSE:NG.) and Drax Group (LSE:DRX) respectively, and a gain of under 1% for the FTSE 100 index itself. 

SSE remains on course to deliver record investment into green energy projects such as wind farms off the coast of Scotland, with investment for the past year in excess of £2.5 billion. An update on its investment plans will accompany annual results pencilled in for 24 May. 

Given its sizeable investment plans, the Scotland headquartered company detailed plans in late 2021 to readjust its dividend policy. In line with those plans, SSE intends to pay a total dividend of 85.7p per share plus RPI inflation for this latest 2022/23 financial year, with the payment for 2023/2024 being "rebased" (reduced) to 60p per share to support its investment plans. Dividend increases thereafter of at least 5% per annum are targeted for 2024/25 and 2025/26.

Group net debt for the year just finished is expected to fall below £9 billion from £10 billion as of its 9-month November trading update. 

Broker Morgan Stanley reaffirmed its ‘overweight’ stance on the shares following the results, with SSE remaining one of its ‘top picks.’

ii view:

Scottish & Southern Energy (SSE) was formed via the merger of Southern Electric and Scottish Hydro Electric. It is the UK's largest renewable generator with around a 4-Gigawatt portfolio and plans to triple renewable output by 2030. 

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For investors, renewable energy production such as wind power is vulnerable to the weather, with its shortfall in output for this latest year proving 13% below its target at the start of year. Interest in buying existing renewable plant has risen in recent years given interest from oil majors such as BP (LSE:BP.), Shell (LSE:SHEL) and TotalEnergies SE (EURONEXT:TTE), while energy producers across the board have found themselves subject to a UK windfall tax. A scheduled rebasing of the dividend payment will also see the historical yield falling from a current 4.7% to figure nearer 3% at the current share price.  

On the upside, a major investment programme continues, with management stressing that investment levels comfortably exceed profits being made. It remains the UK’s biggest renewable energy generator, with the diversity of its operations helping to balance out the volatility of its renewable output, while 5% annual increases in the dividend are planned following the upcoming cut. 

For now, and with renewable investment ongoing and the consensus analyst estimate of fair value sat at over £20 per share, grounds for longer-term optimism look to persist. 

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