ii view: wrong weather for SSE renewables business

Yielding over 5% but vulnerable to changing weather conditions, shares in this FTSE 100 energy company are down sharply on these results. We assess prospects. 

First-half trading update to 30 September

Finance Director Gregor Alexander said: 

“SSE's balanced portfolio of assets of electricity networks, renewables and flexible generation and storage mean that the Company is performing well in volatile market conditions. However, risks remain given continuing market uncertainty and liquidity, a fast-moving policy environment, weather variability, plant availability and the complexity and scale of large capital projects in which SSE is engaged. As always, SSE will seek to manage these risks carefully through the winter period.

“SSE has been clear that any additional profit it may generate, subject to the risks outlined above, will be reinvested in projects that will provide long-term solutions that help reduce the UK's exposure to volatile international gas prices.”

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ii round-up:

Renewable energy provider SSE (LSE:SSE) today maintained full-year profit expectations and stressed it is still investing heavily in clean electricity infrastructure to prevent a repeat of the European energy crisis.  

Adjusted earnings per share for the year to the end of March are expected to rise to at least 120p, up from the prior year’s 95.4p, with record capital expenditure of more than £2.5 billion, including acquisitions, remaining on track. 

However, SSE shares fell over 6% in UK trading having come into this latest update little changed year-to-date. Shares for National Grid are down around 7% in 2022, while Utility Warehouse brand owner Telecom Plus is up by close to 10%. The FTSE 100 index is down almost 5%.

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Output of electricity from SSE’s renewable sources was around 13% below plan, largely due to the wrong weather conditions. However, that was offset by a good performance from its gas storage and more traditional gas fired, or flexible thermal generator plants.  

Developments during the period included its first power from Seagreen, Scotland's largest and the world's deepest tethered offshore wind farm. And the continued construction of what will be the world's largest offshore wind farm at Dogger Bank.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the announcement, with an estimated fair value target of 2,400p per share. 

First-half results are scheduled for 16 November. 

ii view:

Scottish & Southern Energy (SSE) was formed via the merger of Southern Electric and Scottish Hydro Electric. In November last year, SSE outlined an additional investment of £12.5 billion in its renewable energy assets up until 2026, the funding of which requires a scheduled cutting or rebasing of the dividend. 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. Its last declared full-year dividend payment to the end of March 2022 totalled 85.7p per share. 

For investors, renewable energy production such as wind power is vulnerable to the weather, making output unpredictable. The company is subject to regulatory reviews, and a policy U-turn or a change of government could see a windfall tax applied to profits, as with oil majors BP (LSE:BP.) and Shell (LSE:SHEL). There's also the scheduled rebasing of the dividend. 

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More favourably, SSE remains the UK’s biggest renewable energy generator, with aspirations to triple renewable output by 2030. The diversity of its operations is helping balance out the volatility of its renewable output, while the shares sit on a forward dividend yield of over 5%. 

On balance, and while some caution remains sensible given the ongoing debate over corporate windfall taxes, climate change credentials continue to give reason for longer-term optimism.  

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