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SSE a buy-and-hold again?

lse:sse

#1

Is SSE a winner again? A string of good news …

In mid August the announcement of an intended disposal of Retail to Ovo for approx £350M net cash plus a 10-year £100M PIK note at 13.25% nearly double what the market was expecting.

In early Sep a review by MoSt said the rebased 80p dividend was sensible achievable and attractive and said the sp could rise to 1350p. At the time it was only 1150p.

On Monday we heard that SSE were winners of four large renewables auctions with offshore wind projects, so it is achieving its stated strategy and the economics look promising. Politically on point, for those investors with a conscience.

The threat of a Corbyn clause 4 government remains pretty unlikely, under 25% approval in the polls and frightened off an early no-confidence election.

Not heard much of the boring regulated networks side.

I trimmed some of my overweight holding (snapped up some extra in the April-May trough) just after ex-div. Just ahead of this news of progress so now I am kind of regretting that defensive move. Am I confident enough to add some … maybe at the right price.


#2

Well the SSE update ahead of H1s was not great.

Net earnings will be hit by underperformance in the regulated networks business c. £25M, and a lot depends on SSE getting about £140M due from the govt for standby capacity auctions ruled illegal by the European Court of Injustice. If you needed a reason to cheer for Brexit there is one.

Also something to do with balmy conditions not being ideal to make or sell certain types of energy … lower demand, I think quiet Wind mainly … but things are picking up.

The upshot is H1, typically the quiet 1/3 of SSE business might only be 1/4 of SSE business for the year. Which means H2 will have to be super. It remains confident, of course and so does the market … fairly steady sp.

On the bloomin’ marvellous side is the deal with Ovo. So all the cash and more required to sustain the divi if necessary.

Let’s hope the hard numbers in November confirm management confidence. Thanks to a windy September and if a Brexit deal is miraculously achieved we could be winners.

Does SSE have anything else non-strategic to sell off?


#3

Good news today, the EU has decided to release its suspension of Capacity Market payments, which means SSE can now receive the £140M or so which has been held back and is long overdue.

Not sure if this will alter bottom line profit as reported, the income may already have been accrued since this resolution was expected, but it will provide a healthy cash flow boost when the payment lands.

News of a squabble with OFGEM over the cost of new connections to proposed wind farms off the Western Isles and Shetland is not good, since the schemes had previously been given the nod earlier in 2019. Going ahead is essential to both parties and to the idea of accelerating the UK towards being carbon neutral. So how do you resolve a situation where a monopsonic agent wants to squeeze a monopolistic supplier? A compromise of course, but pressure to secure national energy supply is surely greater than any pressure on SSE to invest in something entirely at its own risk on terms which will not be economically worthwhile. New nuclear capacity programmes or interconnects across the North Sea are not obviously riding in like the US Cavalry to save the day.

OFGEM really grinds my gears. Another small challenger Toto gone bust today shortly after getting approval to take on a previous failed suppliers customer base, and while still owing £4-5M of climate change levies which have been paid by consumers to Toto. But not by Toto to OFGEM. The excuse … we did not have the powers to act … is utterly pathetic, imagine those reedy whining tones of the former Commons speaker Michael Martin while excusing his dithering. The day when OFGEM is found to be expensive and not fit for purpose another step closer.

The other news, that CMA will scrutinise the Ovo-SSE merger, is neither surprising nor a real concern. Prior to the previous deal collasing the CMA approved a merger with nPower, so an objection to a merger with Ovo is unlikely … Ovo is smaller and is one of the challenger suppliers favoured by OFGEM. If Ovo is credible that its business model can sustain home energy supply cheaper than the old Big 6, how can transferring 3.5 million households from an old Big 6 to a challenger be anything other than good news for the consumer? I suppose the CMA has to do something (how about cracking on with an inquiry in to rip off insurance) but hopefully with a bit of common sense will nod the deal through swiftly.

Interim results on 13 Nov may not be great, we have already been warned on H1 financial performance, but outlook will surely be brighter. The steady rise in sp from 1000p in May and 1100p in July and 1200p in September should continue. We know the annual divi payment is due to be revised down to 80p, so the interim might only be 20p ex-div c. 16 Jan 2020.

Enough to underpin a 1300-1350p share price as we are today. But actually a review of the potential for the business might see more broker positives and I am beginning to feel this could recover all the way to 1500p.


#4

A well considered and balanced post maritime, and thanks for your thoughts on this.

I have been holding some of these for around 3 years now, so currently still a bit under water, but as you point out, with a considerably improved position since July.

I have pencilled in revised divis of 25p and 55p, but as we know, it will not be more than the 80p. I am quite happy with this level for now.

Not sure if it is quite capable of achieving the 1500 yet as I think it will continue to swing a bit yet in the rapidly moving political environment.

Will certainly continue to hold, but unlikely to add in the meantime.

Thanks

BP


#5

Maybe not 1500p in the short term, and there is no harm in waiting to see how things develop. But I am much more confident about the long term prospects of SSE and its ability to be a sustainable dividend hero. So I am holding on through this recovery rather than cashing in. And would be more confident in adding if sentiment swings back round and the share price slumps into obvious bargain territory.


#6

Not easy to understand the financials in the SSE interim report, clouded by all the adjustments and the transition taking place. But the headlines reinforced the idea SSE is a sound prospect. The rebased dividend likely to be covered going forward, and we don’t really need to know the rest. Do we?

Among the many things I did not understand are the status and consequence of gas production assets held for the sale, the impact of writing off £491M unrealised value from the sale of Retail to OVO, the origin and effect (and real meaning) of Energy Portfolio Management an accounting exercise which seems to strip huge sums from the bottom line, and the throw away statement in the outlook section about challenges ahead including …

“public policy outcomes becoming the subject of judicial processes”

Is SSE signalling it would fight renationalisation in the courts, or is this referring to something else?

Actually I am so confused I am minded to find an opportunity to exit, after all you are not supposed to invest in things you don’t understand. And I really don’t understand.


#7

Marktime1231,

I certainly agree with all of the points in your post, particularly the final point in not investing in things you don’t understand; got caught out this way on another holding I had earlier this year.

I have re-read the half year report twice now today, and even after 25+ years of investing in shares, the best I could come away with was a “gut feel that things are perhaps turning around”, but at the same time “an itching between my shoulder blades” that this could end fairly badly.

So in truth, I am no more comfortable about this holding than I suspect you are.

I will sleep on it further, but suspect that my most likely decision will be to continue to hold until after the outcome of the General Election is known? Think this will have further to bounce if there is a reasonable Conservative majority?

As I have said previously, I am still a little under water on this one, and would like to recover my original capital if I can.

All the best in your own decisions though.

BP


#8

It is possible that the judicial process comment in the interim report was connected to the decision in the High Court today against Ofgem.

SSE were a joined party in the case of British Gas winning a grant of judicial relief against the initial price cap in Q1 2019, basically the big 6 were stitched up by Ofgem making unfavourable flawed assumptions about the hedging of wholesale energy prices. I think British Gas say it cost them £70M, pro rata SSE might be in line for a £40M windfall. Obviously the old price cap regime cannot be undone, so the relief would presumably come from an increase in a future price cap.

Hardly good for the consumer is it, Ofgem not only got it wrong but refused to listen to everyone telling them so, something the court criticised, and even now is excusing rather than correcting its behaviour. Time to shake them up.

As to sleeping on what we think of SSE in the light of its opaque report, I am not so deeply in the red to need to hold for a long term recovery. I will sleep on it too, but if in the coming weeks the sp rises to meet the 24p interim dividend it will be hard to resist offloading.


#9

Can’t argue with your logic there either!

I will certainly review my position by end December.

Best wishes to you either way though.

BP


#10

Offloaded a chunk just now, the sp running up because … was there positive press or broker comment over the weekend?


#11

Not that I am directly aware of?

However, it may be that the market sees the threat of potential Nationalisation under a future Labour Government diminishing in the light of the current Conservative lead in the most recent opinion polls?

BP


#12

An interesting summary.
Now that SSE has reached the 1300 level given the possibility of a Labour Government is it time to sell?


#13

Thanks, my interest in SSE is still long term and a Hold at 1300-1350p but I am furious with its impenetrable report. But as BP says maybe I am being too impatient. I have trimmed all I am going to for now, and may even add some if the sp becomes an obvious bargain again.

Certainly not a good idea to sell on misplaced fears of a Labour government, which is theoretically possible but highly unlikely, even a Lab-LibDem coalition less likely than a Con outright majority despite Boris flailing around on topics other than Brexit.

What might Labour renationalisation plans do to SSE anyway … it will no longer be a retail energy supplier, and it might be happy to hand back its management of already-regulated network infrastructure. Does Lab plan include seizing the SSE-operated gas power stations … not sure, maybe. Apparently a sale of SSE’s gas production assets already in the pipeline (ha ha). But Lab surely cannot sequester the new wind energy assets SSE is developing at its own investment expense with various JV partners? And that is now where most of SSE’s value lies. I think.

If you were looking to offload some I would wait until the outcome of the General Election, and for the sp to run up to the 24p ex-div on 16 Jan. Unless you are itching to shift your bet to …


#14

Thanks for your thoughts and of course you may be right!
However I have the following comments.
Given the way the market ‘looks ahead’ of the current status quo it is difficult to escape the conclusion that the market price has got ahead of itself. Only in. At this year the stock traded at 1012p, so there has been a 30% uprating since then. What has changed? On the positive side the Company has struck a deal to offload its loss making energy Services division and with Government commitments to a zero carbon future the natural resources in Scotland from Hydro and Offshore will stand SSE in good stead. Also it’s commitment to the dividend and the dividend yield on the shares will offer support for the price.
On the negative side the Company has come through a period of poor performance especially on the Energy Portfolio Management sector.
Looking at the balance sheet £1bn of capital has been lost to Shareholders. The short term political outlook looks uncertain with the possibility of a Labour government which would take radical policy steps with the utility industry. It seems it might be a good time to offload and review after the outcome of the election.
Regards
Kennetg


#15

SSE sp holding up.

They have submitted the RIIO investment plan proposal 2021-2026 to Ofgem calling for an extra £7 pa per consumer on capped tarrifs, in particular to pay for connecting up new wind energy generation in Scotland. That is a trivial increase but I expect Ofgem will kick back, it has already said wind farm connector costings were too high for its liking. In contrast NG’s RIIO proposal, which includes work on how to adapt the gas grid to hydrogen, were cost neutral to the consumer “in real terms”. Eh?

As expected CMA have nodded through the Ovo merger which should proceed to completion Feb 2020.


#16

Well, as things turn out it has nearly hit 1500p in the short term. Such an unexpectedly big surge in the sp I have cashed in half my holding in the recovery portfolio today at 1460p.

Can’t understand why it is suddenly trading on a p/e of 21, people need to calm down and then SSE should settle back towards 1350p.


#17

Thanks for your update marktime;

I previously said that I would review this again at end December as I was still under water on this one.

However, I did not anticipate anything like this surge, and as of yesterday I am now sitting back in positive territory for the first in quite a long time.

And bizarrely I am now unsure what do to as I think this is a now reasonable price based on the reduced annual dividend of 80p.

I will reflect for another week or so (and yes, I may well kick myself very hard for that delay!!); I do not see this growing significantly further in either the near or medium term, but have held this for dividend income, which I now think will remain steady from here.

Logically, sell half and keep half is probably the prudent decision?

BP


#18

I have kept a reduced holding in my long term income portfolio, and I will add back when the sp settles somewhere sensible. It is the stake in my recovery portfolio, one I have been holding waiting for the price to recover, which I have just off loaded.

Why do you think the sp has immediately jumped to 1460p? When I said this might return to 1500p I had in mind a year or two.

The dividend is safe at 80p which is a forward yield just under 5.5%, maybe that is enough for most people, and I might be content to continue to hold some at this level, but there is nothing new in the performance or outlook to justify a p/e in the 20’s is there? Ofgem are not likely to release their squeeze on the margins to be made in operating the regulated networks.

I think the relief at the election outcome has caused an overshoot.

Well done for taking a steady measured approach , I am too impatient and hasty most of the time.


#19

The only real events in the past couple of weeks has been:

  1. Confirmation that the OVO deal will go through without further referral
  2. General Election result precluding further Labour interference/threat of Nationalisation for another 5 years.

Still surprised by the extend of the rapid rise though; might still drop back further?

BP


#20

Ahem … trading peaked at 1502p today, and that is after a 24p ex-div yesterday. Reacting (over-reacting?) to confirmation of the OVO deal, and … despite a cooler comment from Goldman Sachs and Blackrock trimming their position, p/e is now over 22.

Surely time to scalp profits if you have not already done so and wait for this to swing back to normal. This is not normal.