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Following our recent report studying whether SSE needs to raise equity, and ahead of our ideas call on the company this Monday 27th Oct at 2pm UKT / 3pm CET / 10am ET, we outline in this short note feedback from our discussions on the topic with clients. Since our balance sheet analysis work in early October, SSE shares have risen by more than 10%. Counterintuitively in our view, that only increases the chance that the company decide to raise capital, which we think could unlock even more share price outperformance by clearing emotional balance sheet overhang fears. With suggestions in the press that the UK government might write greater fiscal headroom into the UK budget on 26th Nov - a tailwind for gilt yields, borrowing costs and SSE - and with the sector performing strongly in recent weeks, there is a use-it-or-lose-it window emerging in our view for a raise to happen at 1H results on 12th of Nov, or even before that. At the current 1,900p share price we still have nearly 35% upside to our target price, and estimate that a GBP2bn raise conducted at GBP18 (GBP2 higher than considered in our earlier note) would now only be c.5% EPS dilutive. Key feedback from clients on our discussions over SSE''s balance sheet: . Most investors we spoke to thought SSE should go ahead and raise, as balance sheet risk has become too much of a distraction to the underlying equity story. These clients were more inclined to look at a raise in practical investor-attitude terms, and less as a cost of equity vs. return on equity debate. Most believed the act of clearing SSE''s perceived balance sheet overhang risk would likely trigger a share price rally irrespective of the implied cost of equity and dilution for pre-existing shareholders. . However we also spoke with a smaller but outspoken group of investors who felt that raising at a share price (at the time) of around GBP17 would be against the interest of existing shareholders, with the implied cost of new equity reaching...
SSE PLC
We have corrected links in our model to properly reflect Seagreen capital injections in our database. We do not consider the changes to be material; our rating is unchanged.
We think SSE could see a near-50% share price liftoff if new CEO Martin Pibworth successfully navigates the company out of the current emotional fear cycle over equity needs. In this 20-page note, we deep-dive on two scenarios: an equity raise, and a balance sheet fortification plan involving hybrids and asset sales. We conclude a combination of both is most likely. Entering the shares at the right moment - or in a raise - could offer you almost as much upside as Elia, now 60% up since it raised in the spring. We reiterate Outperform with even greater conviction than before. This note is based on detailed new work and carries several new conclusions 1) We est. SSE would need a GBP3.3bn raise to fully plug the balance sheet to FY31 in a scenario of high grid capex, low power prices and high borrowing costs, 2) an alternative disposals and hybrids plan would need to be very big - potentially too big - to achieve the same result, 3) in theory action isn''t needed immediately - we see the B/S as secure until ~2029 - but in practice the UK election (also in ''29) and perceived overhang risk means SSE needs to take action much earlier in our view. There are three possible outcomes, we think; most should allow to generate significant alpha 1) A raise, perhaps with additional top-up disposals, 2) a specific disposal-only action plan, or 3) maintaining the status quo of emphasising balance sheet levers. The last one could risk attracting activist interest in our view. But the first two could spark a very powerful share price recovery by clearing perceived overhang risk. A cGBP2bn raise + some disposals is the sweet spot in our view. Early 2026 seems the most opportune timing, but we wouldn''t totally rule out 1H results on 12th Nov. Fundamentals are strong with 16%/10% EPS CAGR FY26 through FY29/31 And the shares are at a quasi-distressed c8.5x FY27 P/E vs. peers like Iberdrola on 16x. UK politics could be an alternative explanation for the discount, but we...
We spoke to SSE after this morning''s pre-close RNS update. The conversation makes us more comfortable about 154p FY consensus, with the weakish 1H guide driven by y/y changes in earnings mix rather than any deterioration elsewhere in the business. Key points from the conversation: . Expressing confidence that the 1H guidance is consistent with past guidance and FY consensus . The previously-flagged step-down in distribution revenues has altered the seasonality of the business, explaining the slightly weaker 1H EPS phasing guidance vs. previous years. Distribution is more equalweighted in the year whereas the wider business is more 2H weighted, therefore any decline of distribution earnings in the mix will naturally skew overall EPS further to 2H. . Wind speeds have been robust since July after a challenging start to the year; September was good. . Co is pleased with the rate of capex execution in 1H and ASTI project approvals. FY26 capex cons. still looks a little high to us at GBP4bn vs. us GBP3.3bn. . FY27 175-200p guidance firmly reiterated.
BNPP Exane View: This is not a strong guide for 1H, but should have largely been expected. 1H midpoint preclose guidance of 35p equates to 23% of 154p FY consensus, which is at the bottom end of the last 3yr 1H/FY range of 23-31%. Company is citing distribution phasing (already flagged back in May) and low wind speeds (widely known by investors). Neutral-to-small negative in our view. There are also headlines this morning on the Conservative party scrapping net-zero targets- we wouldn''t expect these to have a major impact on UK utility shares given the Conservatives'' trailing position in the polls. SSE has released its 1H 25/26 pre-close trading statement. Key points: . 1H26 adjusted EPS expected to be in the range of 33-37p, towards the lower end of the usual seasonal average of between 20 - 30% which reflects the lower contribution from Distribution as outlined in May. . Expectations for full year performance as outlined in May remain unchanged. . Accelerating delivery in networks businesses with investment increased ~60% period on period. . Strong renewables operational availability offset by unfavourable weather conditions - notably across April and May - with the first half output expected to be around 2% lower than the same period last year. . The Group remains on track to deliver 2026/27 adjusted EPS of 175 - 200 pence. Separately, Conservative party leader Kemi Badenoch will pledge today to scrap the UK''s main climate law according to the Telegraph (link). We don''t see this as having an immediate impact on UK energy utilities given 1) the Conservatives are behind in the polls, eclipsed by Reform who have already made even more significant anti-climate policy pledges, and 2) the climate change act in question is a long term piece of legislation driving a wide range of policies including heat pump and EV targets, many of which wouldn''t immediately impact company financials.
What happened? The Scottish Government has granted consent for SSE''s 4.1GW Berwick Bank offshore wind farm, located off the east coast of Scotland. The decision represents the last major consent necessary for the project to proceed, clearing the way for it to be bid into the upcoming AR7 CfD round. Company press release here. BNPP Exane View: It had been widely expected/hoped that a decision would come in time for the project to be bid into the AR7 renewable contract for difference (CfD) auction, which is currently getting underway and is expected to award support contracts around the end of this year. The approval is therefore a positive / confirmatory execution milestone for SSE. However, it''s likely to intensify scrutiny of SSE''s balance sheet given the size of the project. SSE would likely cover a significant proportion of capex with project financing and sell c60% of the equity after FID, substantially reducing net cash out. But on our numbers, which include a Berwick Bank COD in 2032 and 60% farm down in 2026, group credit metrics start to look stretched by the end of the decade. Despite a growing market view that SSE is less likely to need an equity raise after favourable-looking cashflow dynamics in the RIIO-T3 draft determination for power transmission, our view is that there would be some logic to raising in the next twelve months. In particular we think SSE may find it harder to raise once we get closer to the next UK elections in 2029, making the next ~2 years a lose-it-or-lose it fundraising window. Potential accretion from EBITDA upgrades at the start of RIIO-T3 would provide an EPS cushion to dilute against, and an AR7 contract for Berwick Bank would provide a valid pretext to rethink balance sheet needs over the next decade. We note that in most cases, companies in the sector that have raised over the last couple of years have not seen any lasting structural decline in their share prices; conversely several have seen shares rise...
SSE is facing an upcoming wave of events and catalysts, including a potentially imminent govt decision on zonal pricing, the RIIO-T3 regulatory determination for transmission, and the AR7 renewables CfD auction. We think the co is also getting closer to the point where it will need to update on its funding strategy. We see scope for each of these to be positive catalysts for the shares, which despite a recent pickup still trade at a substantial discount to peers. Reiterate Outperform. Several important events approaching - we think each could prove positive We do new work on two of the more imminent catalysts alongside this note: 1/ a zonal pricing decision from the UK govt - we think a damaging outcome for SSE is looking less likely (see note), and 2/ The RIIO-T3 transmission draft determination - previewed here- which we think will prove benign. Balance sheet could be a catalyst too Investors have raised concerns about SSE''s balance sheet, with the co''s assertion that they are fully funded to March''27 now providing little over 18 months of comfort. But we wonder whether this is actually an opportunity rather than a threat. A growing list of peers that raised equity recently saw their share prices increase afterwards. Conditions are improving for UK issuance, with the FTSE 100 just reaching an all time high. And SSE have means to control the timing in our view, with disposal options that could buy time to execute on their own terms, should equity ultimately be needed. Stock remains cheap and earning revision risks skewing positively in recent weeks SSE shares have recovered from their March lows but have barely outperformed the sector during that time and still trade at eg a c30% P/E discount to peer Iberdrola. Wind speeds have picked up in June, and UK power prices have rallied; both could prove supportive for earnings. We see multiple positive catalysts starting to align. Reiterate Outperform. See our accompanying notes on zonal pricing here...
We have adjusted our estimates to harmonise allowed RoE and RoD assumptions for the RIIO-T3 regulatory review, at 5.5% and 3.38% respectively, for National Grid and SSE. The changes have a negligible impact on our EPS estimates and our TP and rating are unchanged.
Speaker: Martin Pibworth, CEO What we learned: . Zonal pricing - supportive comments from the new CEO that the impact from zonal pricing - if implemented - could turn out to be low for SSE, pointing out 1/ that the networks investment plan would not be affected at all, 2/ CfD projects would be grandfathered, and 3/ downside risk can be offset by capital discipline / higher bids in future CfD auctions. That leaves only c2GW of intermittent renewables exposed in Scotland, but downside there could be offset by greater profitability for flexgen assets, some of which are in the south of the UK. CEO also pointed out that implementation would take c7 years giving SSE plenty of time to respond and adjust. . Affordability debate in the UK - CEO thought there could be some positives in the debate being overlooked - highlighted the forthcoming 9% decline in regulated UK energy tariffs due to lower gas prices, and also potential decline in subsidy costs as ROC green certificates expire in 2027. New renewables eg. Dogger Bank will bring baseload prices down. . Balance sheet - reiterating they are fully funded until FY27 (which has been the mantra for some years now) - and tackled the question by highlighting optionality e.g. via hybrid issuance, minority stake sale in distribution, etc. . AR7 UK CfD auction - emphasised the low cGBP25m lease fee paid for Berwick Bank as a competitive advantage in the auction. Unclear how much the govt. will seek to contract overall. Berwick Bank planning - are hopeful it will come through in time, but are not supportive of new flexibility that could allow bidding the project without planning, as could potentially leave things in limbo for a long period of time making it hard to secure supply chain. Overall tone: Positive
Initiation of coverage With this report we initiate coverage of SSE ADR, in coordination with our pre-existing coverage of SSE. We have an Outperform rating on SSE ADR with a target price of USD 31.7, implying FY Mar''26 P/E of 15.0x. Our latest research on SSE can be found here.
Parsing through yesterday''s numbers, we think concerns over a cashflow miss look overdone, although we trim our FY26 EPS to a touch below cons. on lower capacity additions. Bigger picture, the shares remain on low multiples, the incoming CEO was soothing on zonal pricing, and we see chances of an eq. raise as negligible in the near term. Maintain Outperform. Valuevolume, GBP3bn cut to capex and networks pivot From a strategic point of view, the important take from these results is that SSE is mimicking other large European peers by trimming renewables capex and increasing the weight of networks in the investment mix. The foray into international renewables appears to have been de-emphasised, returns hurdles raised, capacity addition targets cut to 7GW by Mar''27 (prev up to 9GW) and GBP3bn taken off the capex plan. The capex trim caters favourably to many investors'' continued scepticism on renewables, and is supportive in our view esp. given the co has maintained FY27 EPS guidance. An event-heavy 9 months ahead: Zonal pricing decis., RIIO-T3 reg review and AR7 CfD auction Asked when we could next expect a CMD, incoming CEO Martin Pibworth highlighted these three strategically-critical events as important milestones to get past before rolling forward current Mar''27 targets. Our best guess is we shouldn''t expect a major strat. update before calendar 2026. We think each of these events has the opportunity to be a certainty catalyst that could help the shares rerate. Adjusting FY26 EPS, less worried on op. FCF though - small bump in TP from 2320 to 2355 We cut our FY26 EPS from prev c4% ahead of cons to 1% below, mainly on lower renewables additions although this is offset by higher capacity payment ests by FY27. We look at capex/op.CF/net debt dynamics on p4 and conclude that concerns about an operating cashflow miss post yesterday''s call look overdone.
Overall view on the call: Messaging from the incoming CEO was good in our view, comments on numbers and FY27 guidance were supportive, but there was a lingering question on why capex cuts haven''t translated into lower leverage, and the call drew greater attention to the quite significant writedown in the southern European business. New CEO Martin Pibworth demonstrated a good awareness of current investor concerns - reassuring on zonal pricing impacts, emphasising value over volume (alongside a renewables capex cut today), and arguing the business can still grow amidst a more polarised political debate on UK clean energy. But with the co guiding to around 4x ND/EBITDA in FY27 we think balance sheet will remain in focus, although we think there is no imminent need to raise, nor much likelihood of a raise happening at the current share price. Key points from the call: . Zonal pricing. Not going to have an impact on SSE transmission buildout in the near term inc. ASTI and LOTI projects. Would expect some grandfathering for generation if it is implemented. Have flexible plant in southern zones which could benefit from higher prices if it happens. Should not take negative view on zonal pricing as an indicator that it''s significantly negative for SSE. A subtle tightening up of the messaging ... from previously ''this is really bad'' to ''this is really bad for the system but not necessarily that bad for us'' . New CEO key priorities. Currently focused on big policy announcements due in the next few months: zonal pricing decision, RIIO-T3 regulatory review, AR7 CfD auction round. Still positioning the business as a UK-Ireland clean energy champion. Focused on continuity and delivering the existing plan. Too early to commit to a CMD/strat update date due to unclear timing of policy announcements. . GBP3bn capex guidance cut. GBP1.5bn comes from less renewables spend including slowdown in southern Europe, and big offshore wind development projects progressing...
BNPP Exane View: This looks overall in-line we think. Reported FY25 earnings are definitely in line after adjusting for a small EPS definition change, although with a miss in transmission and beat in customer solutions / other. There is no FY26 overall EPS guidance and the divisional guidance looks like a mixed bag to us, transmission looks ahead and renewables perhaps behind, with some language interpretation needed, then FY27 guidance is unchanged but importantly despite quite a material GBP3bn reduction in capex guidance and a higher mix of networks. As usual lots to digest with SSE but on first look would expect this to have a neutral impact overall. SSE has released its FY25 results. The key highlights are: . Adjusted op. profit in line, GBP2,419m vs. Bbg consensus GBP2,396m (+1%) . Adjusted EPS (p) touch ahead, 160.9p vs. Bbg consensus 158.6p (+1%) ... helped by a 1.9p definition change, so in-line without that . Final DPS (p) in line, 64.2p vs. Bbg consensus 64.2p (-) . Net debt and hybrid capital in line, GBP10,187m vs. Bbg consensus GBP10,117m (+1%) Guidance: . Five-year investment expectations reduced by GBP3bn to around GBP17.5bn ''reflecting financial discipline across the energy businesses and consent phasing in Networks'', this is bigger than it looks given we are already 3 years through the 5 year plan ... ''with an upweighting of networks investment, now expected to be ~60% of the five-year investment plan'' . 175-200p FY27 EPS guidance is unchanged despite the capex trim . ''Consistent with the approach taken in prior years, SSE will look to give specific [FY26] adjusted Earnings Per Share guidance later in the financial year.'' . ''In line with SSE''s existing dividend plan to 2026/27, it is expected that the dividend will increase by between 5 - 10% this financial year'' . ''[FY26] capex is expected to continue to increase to over GBP3.0bn'' (Bbg cons is at GBP3.2bn) FY26 divisional guidance (copied from release with our comments in bold italic): . SSEN...
We have adjusted our estimates to reflect today''s pre-close RNS update and recent technical disclosures including the Ofgem PCFMs for networks. We do not consider the changes to be material; our rating is unchanged.
What happened? SSE has released its pre-close trading statement ahead of FY Mar''25 results on 21st May, key points: . 2024/25 adjusted earnings per share expected to be in the range of 155 - 160 pence. Bloomberg consensus is at 160p. Previous guidance from early Feb was 154 - 163 pence. . Guiding to GBP3bn capex; consensus at GBP3.2bn. . Renewables output of around 13.0 TWh, +17% YoY reflecting capacity additions and ''variable weather conditions which have continued in the final months of the year'' . Adjusted net debt and hybrid capital expected to be around GBP10bn at 31 March y/e; cons at GBP9.6bn. . FY27 EPS target of 175 - 200p reiterated. BNPP Exane View: Investors had been focused on very weak wind speeds in the early part of calendar 2025 and a weak guide today may have been expected by some. In that context the new EPS midpoint, a touch below consensus and within the previous range, could have been worse in our view. Capex is a little light and debt slightly worse but there are no new delays to offshore wind projects and the FY27 guidance is reiterated. We would expect either a neutral or a very small negative impact on the shares.
What happened? SSE has announced the appointment of internal candidate Martin Pibworth as Chief Executive designate, following a competitive recruitment process. Pibworth will formally take over from current Chief Executive Alistair Phillips-Davies CBE following SSE''s AGM on 17th July. Pibworth joined SSE in 1998 and has held a number of key commercial roles in the Company over the last three decades, joining the Executive Committee in 2012 and the Board in 2017. As Chief Commercial Officer he has been overseeing SSE''s Renewables, Thermal, Energy Markets and Energy Customer Solutions businesses. BNPP Exane View: Pibworth is well-respected and was seen as the most likely candidate amongst investors we spoke to since outgoing CEO Alistair Phillips-Davies announced his intention to retire. An internal succession means SSE is more likely to continue with its existing growth strategy in networks and renewables in our view, and we think certainty over the CEO should provide an element of support after recent underperformance of the shares (a phenomenon seen at other companies eg. Elia, during CEO interregnums). The formal handover date in July is a little later than we expected and might point to a full-scale capital markets update, increasingly needed in our view as we draw closer to the Mar''27 end-date of the current plan, more likely happening at the end of 2025 or in early 2026.
Stock / Analyst: SSE (Outperform, TP 2340p) / Harry Wyburd Speaker: Martin Pibworth, CCO Conclusion: Unsurprisingly many questions on zonal pricing, but outside of that the meetings mostly focused on supportive topics inc. capex envelope (Coire Glas, Berwick Bank, etc.) and potential UK power price upside on carbon market harmonisation. Whether because of debate shifting to zonal pricing, or the current level of the share price, there was less focus on the balance sheet than in past meetings. Main takes from the meeting: . Zonal pricing - SSE have been steered by the govt to expect a decision by the summer. Remain strongly opposed, with a focus on risk to power market liquidity and cost of capital which could manifest eg. in higher CfD clearing prices. Think that some have interpreted Ofgem comments as full-fledged support for zonal prices whereas their actual language on it has been more nuanced. If implemented, would not expect it to go into force until the early 2030s. We also hosted an interesting and friendly debate with SSE and Octopus Energy (private) on zonal pricing as part of our UK Clean Power panel. . UK carbon / power prices - Think it''s looking increasingly likely there will be harmonisation with the EU. That could add in theory high-single-dig to UK power prices, which are already well above SSE''s GBP65/MWh guidance assumption. . Balance sheet - Emphasising the many levers available to manage the balance sheet- pace of asset disposals/farm downs, hybrids, some element of flexibility on timing and phasing of capex. Reiterating fully funded to 2027. Less questions on this than we''ve had historically - likely due to being eclipsed by the zonal pricing debate and due to the recent decline in the share price. . CEO succession - No specific updates but the process is ongoing and hopeful of an announcement before FY results in May.
BNPP Exane View: SSE has guided a fraction below Bbg consensus for FY Mar''25. But given the recent underperformance, we don''t think this will necessarily be taken negatively by the shares, especially as co has reiterated divisional guidance and FY Mar''27 long term EPS guidance, and confirmed that the Dogger Bank offshore project is on track. Overall a straightforward release and we wouldn''t expect any major changes to consensus. SSE has released its Q3 trading update. Key points: . 2024/25 full year adjusted earnings per share expected to be between 154 - 163 pence; midpoint is 3% below Bloomberg EPS consensus of 162.9p . Business unit operating profit guidance unchanged . Release mentions ''variable weather conditions'' which have extended into January . Dogger Bank still on track for 2H25 timeline and second vessel now reserved from 2026 for the second and third phases of the project . 175-200p FY26/27 EPS guidance reiterated . There will not be a conference call
We are discontinuing coverage of SSE. Our last recommendation was Buy, and our last TP was 2,060p.
With the retiring CEO having presided over a transformation of SSE over the past decade, we think investors will be watching for any change in attitudes towards capital allocation and balance sheet under his successor next year. Meanwhile, although 1H results weren''t seismic financially, we think comments on the call should help pacify worries about Dogger Bank timeline delays. CEO succession: changing of the guard Retiring CEO Alistair Phillips-Davies is well-respected and has presided over SSE''s transformation from a mature domestic incumbent utility into a globally relevant renewables and power networks growth play over the last decade. However, we don''t see an orderly management transition as compromising the investment case, nor do we see anything ulterior in his decision to retire after 27 years at the company. The bigger question for us is what succession could mean for the next financial plan iteration - a lot has changed since SSE''s ''NZAP'' 2027 plan was laid out and we think an update is due in the not-too-distant future: it will be important to gauge any change in direction under new management especially wrt. renewables capital allocation and balance sheet outlook. Dogger Bank offshore wind delays: cutting into generous buffer in our view SSE acknowledged a negative impact on returns from the latest delay, but emphasised offsets like delayed CfD startup (= higher short term achieved prices) and balance sheet-positive delays to capex equity injections. We think worries over the project are overblown; we trim our FY26 EPS slightly to account for a delay and higher capex/lower value creation, but still sit towards the top end of the 175-200p EPS guidance range by FY27 and a touch above consensus for FY26. Tweaking numbers, this year slightly up, next year slightly down We raise FY25 EPS by 3.5% mainly on strong 1H volumes, bringing us in line with cons., and trim FY26 by 2.5% but still slightly above cons. We roll forward our valuation...
Overall view on the call: Straightforward comments from the CEO on motivations for retirement after 27 years at the company, and we expect an orderly succession later in 2025 with limited impact on the share price or investment case. Aside from that the main focus was on Dogger Bank amidst the latest delay: on the one hand there was admission that this will negatively impact returns in isolation, but on the other, some supportive discussion on offsets like delayed triggering of the CfD and later timing of capex equity injections which might be balance sheet positive in the short term. Key points from the conference call: . CEO retirement. CEO has been at SSE for 27 years inc. over 11 years as CEO. Are now within ''touching distance'' of 2027 targets and see it as the right time for the company to pass on to new mgmt. Expects to be around until sometime later in 2025. . Dogger bank economics. Clearly there is an impact on returns from the delay, but equity returns remain comfortably above hurdle rates for all stages of the project (A/B/C) due to offsets from higher inflation of CfD revenues. Also delay means the CfD is triggered later, so more time on higher merchant prices for turbines that are producing, and capex equity injections pushed into the future. . Dogger bank timing. 32nd turbine about to be installed, still now aiming for H2 2025 for full COD of Dogger A, with B and C each following a year after the other so 2H 2025/26/27. . Thermal performance. Performance in the first 6 months of the FY has been weak due to strong hydro and wind output which has led to extremely low volatility. However recent weeks have seen some of the highest daily spark spreads of the last few years ... small positive message for H2. . UK zonal pricing. Expect the govt to make policy recommendations in the spring of next year. SSE continue to believe that zonal pricing would be disruptive and damage investment. Also think that strong progress on networks and...
SSE’s balanced business mix provided resilience, as a return to favourable weather conditions meant increased SSE Renewables profitability offset a lower SSE Thermal contribution. Net debt at the end of the period was £9.8bn. We maintain our Buy recommendation and 2,060p TP.
BNPP Exane View: In-line results considering guidance from the earlier pre-close announcement, and no change to FY outlook nor COD timeline on Dogger Bank. CEO Alistair Phillips-Davies has announced that he will retire after 11 years but will remain in place until a successor is appointed, we don''t expect this to have a disruptive impact and it comes after the longstanding CFO retired last year. SSE has released its 1H24/25 results. The key highlights are: . 1H EPS 49.8p vs. company preclose guidance of 45p (no viable consensus). The 1H result represents 30% of FY Bbg consensus of 164p which is in line with last year''s fill rate on 1H vs. FY24 actuals. . Interim DPS in line, 21.2p vs. BNPPE est. 21.5p (-1%) . Company stating ''Expectations [are] unchanged for full year adjusted operating profits'' and FY EPS guidance to be provided later in the financial year. . ''Group remains on track to deliver 2026/27 adjusted earnings per share of between 175 - 200p [unch]'' . CEO Alistair Phillips-Davies has informed the Board he intends to retire from SSE during 2025 after 11 years, but will remain in place until a successor is appointed. . Dogger Bank offshore wind farm: ''completion expected in the second half of 2025 with equity returns remaining comfortably above hurdle rates'' in line with previous statements. The conference call will begin at 08:30 UK time, dial in https://edge.media-server.com/mmc/p/9bft4i7j/
SSE expects the Thermal division to deliver FY adjusted operating profit of at least £200m in the current market conditions. The group delivered several projects in 1H as part of its fully funded £20.5bn NZAP Plus investment programme. At 30 September, it expects net debt to be around £10bn. We maintain Buy, TP 2,060p.
We follow up our FY24 results postview by updating our SSE model for FY Mar''24 actuals and the company''s new targets. We raise our EPS by c10% reflecting upgraded guidance from the company for electricity transmission and tax, leading to an 11% increase in our PT to 2,380p (from 2,140p). Upgrading our longer term ests In our postview - see full report here - we expected SSE''s consensus earnings trajectory to steepen given more cautious guidance in the near term for thermal, and upgrades in the medium/long term on transmission and tax. We now reflect these dynamics in our model, raising our FY27 EPS by 12% more than for FY25. Tax is the most significant lever here - the company has guided to a 12% average adj. tax rate across the plan period which mechanically implies very low rates by FY27. Earnings mix and buffer improvement The updated guidance reflected in our numbers implies an improved mix (greater share of electricity transmission) and more headroom on FY27 targets: we now sit a touch ahead of the midpoint of SSE''s 175-200p FY27 EPS guidance. Maintain Outperform We think SSE''s new guidance drew a line under earnings risk on flexgen/thermal and acted as a clearing event. The uneventful 1Q trading statement should also provide some comfort. Positive momentum on the longer term FY27 earnings outlook, attractive multiples given SSE''s quality asset mix, and resurgent investor interest in the UK after the election result all add confidence to the investment case: reiterate Outperform. See our postview for more detail.
This 1Q performance reflected the strength of SSE’s balanced business mix, comprising onshore and offshore wind, hydro, thermal generation and transmission and distribution grid infrastructure. Two-thirds of group revenue is either regulated or already backed by government policy. We reiterate Buy, TP 2,060p.
Main takeaway from results is that SSE''s earnings trajectory has steepened: we think FY Mar''25 consensus might slip a little, FY Mar''27 on the other hand looks solid on underlying transmission and tax upgrades. New more cautious near term guidance on flexgen/thermal probably draws a line under downside risk but we''ll likely have to wait until later in the year to get a firm guidance floor for ''25 EPS. Overall a moderate clearing event and injects some confidence back into to the O/P. Short term earnings: Looking worse but to some extent expected Focusing on FY Mar''25 earnings, SSE 1/ did not give EPS guidance vs. doing so in some prior years, 2/ guided to floor EBIT in thermal of GBP200m (VA consensus into results cGBP375m), 3/ did guide up distribution significantly, although we had already reflected this after the March trading statement. With the lower thermal guidance and mgmt. declining on the call to confirm if EPS would be up on FY24 (158.5p), we see a risk that FY25 consensus (~160p) slips a little (we are at 151p). Long term earnings: Better By contrast two things that matter for the FY27 EPS guide: 1/ underlying upgrades on transmission and lower tax, which are relatively bankable in our view, 2/ as a result mix improves. Rather than eating into contingency buffer to reaffirm the guide, there is probably a similar margin of safety today vs. at 1H last November in our view. This is positive. Is it enough? We were cautious on numbers going into results but hoped a rebasing of near-term EPS expectations for lower flexgen/thermal could act as a clearing event for SSE. Has that now happened? In our view probably yes, although perhaps not as definitively as would''ve been the case if SSE had guided explicitly for ''25. Overall we feel a little more confident again in the Outperform. See p2 for key takes from the conference call.
SSE delivered investment of £2.5bn over the year, primarily on major onshore and subsea transmission cables, the world’s deepest fixed-bottom offshore wind farm (SeaGreen), as well as progressing the world’s largest offshore windfarm (Dogger Bank A). We maintain our Buy rating and 2,060p TP.
SSE is on track to deliver investment of c.£2.5bn in FY24, reflecting a quality project pipeline, comprising offshore and onshore wind, hydro, energy storage, thermal with CCS and networks projects. The balance sheet remains strong. We expect adjusted net and hybrid debt to be c.£9.5bn at 31 March 2024. We maintain our Buy recommendation and TP of 2,060p.
Following the departure of the covering analyst, we are suspending coverage of SSE, withdrawing our forecasts, target price and recommendation with immediate effect.
SSE said it is seeing improvement in the long-term policy and regulatory environment, including a significant increase in the strike price for Allocation Round 6 of CfDs for offshore wind projects. We maintain our Buy recommendation and 2,060p TP.
FY24 EPS guidance confirmed In its planned trading statement, SSE has reaffirmed its guidance for full-year 2023/24 adjusted EPS at more than 150p (INVe 152.7p), noting a narrower range of probable financial outcomes for the full-year following lower-than-planned renewables output over 3Q. Renewables output remains below plan, lower spark spreads in thermal SSE Renewables output over the first three quarters was c.15% below plan, or 10% below plan relative to the full year, impacted by mixed weather conditions, short-term plant outages and rephasing of flexible hydro output into 4Q. January has seen continued mixed weather conditions for the renewables fleet. SSE Thermal’s performance continues to reflect lower spark spreads and market volatility compared to the 9M23. However, the business is still expected to deliver its guidance of more than £750m (INVe £789m) adjusted operating profit, including more than £75m (INVe £91m) from Gas Storage, for FY24. SSE remains on course to deliver adjusted investment and capital expenditure of c.£2.5bn (INVe £2.8bn) in FY24. Delays at Dogger Bank A => eyes on May results for update Turbine installation on Dogger Bank A has been affected by challenging weather conditions, with vessel availability and supply chain delays further impacting progress, and there is an increasing possibility that full operations will not be achieved until 2025. SSE is of the opinion that this is not expected to materially change project returns, and a further update on progress will be provided in May with publication of the FY24 results. In our view, the delay could cause an element of disappointment.
SSE reported good earnings with operating profit down by 3% vs last year as expected due to a decline in the gas storage activities and higher operating costs in distribution not offset by a 200% surge in SSE thermal. The FY23/24 guidance was confirmed whilst the 2027 capex programme has been increased by £2.5bn dedicated to transmission.
SSE reported a stronger performance in Renewables operating profit in 1H (£86.8m, vs £15m in 1H23), and a robust operating profit performance in Thermal (£226.2m, vs £248.2m). Overall, adjusted EBITDA was flat at £1,109.6m for 1H, vs £1,109.3m for 1H23. We maintain our Buy recommendation and 2,060p TP.
EPS beats Adjusted operating profit of £693m (vs. INVe £689m) and adjusted EPS of 37.0p (vs. INVe 31.4p), and ahead of guidance of “at least 30p”. As can be seen in Figure 1 overleaf, there are many moving parts that have contributed to a broadly in-line outturn. Net debt (including hybrid) of £8.99bn beat our £9.5bn estimate. A DPS of 20.0p is ahead our 18.0p, but SSE has indicated that this represents 1/3rd of the rebasing of the full-year dividend to 60p. SSE’s guidance for FY24 EPS remains “at least 150p”. Our pre-existing FY24E EPS is 152.7p. A webcast will be held at 8.30am with slides available shortly before commencement of the presentation. Investment envelope expanded SSE has announced a £2.5bn increase to its NZAP Plus investment plan to FY27, with SSE now expecting to invest £20.5bn over the five years to FY27. This compares to a previous indication of £18bn, with the £2.5bn additional investment solely allocated to SSEN Transmission business and driven by increasing visibility over LOTI and ASTI spend and associated supply chain costs. SSE has indicated that the Investment plan remains fully funded, with net debt / EBITDA still expected to remain within the 3.5-4.0x target range. SSE is now expecting to grow net electricity networks RAV to more than £15bn by FY27, from the previous £12-14bn target, and is alluding to greater certainty that FY27 adjusted EPS will be within the 175-200p target. We look to Ofgem’s AIPs at the end of the month for further colour.
Target price raised to 2,280p: Following the recent trading statement, and ahead of 1H24 results on 15th November, we have refreshed our SSE model and valuation. Negligible change to near-term earnings (Figure 1), but our target price is raised by c.5% to 2,280p. 1H24E adjusted EPS of 31.4p (Figure 2) aligns with guidance. Prudent valuation: Our modelling approach is that we include very little new build capacity that has not reached FiD, or capex not in Ofgem’s regulatory models for networks => our capex numbers below SSE’s NZAP+ at c.67% of SSE’s planned £18bn to 2027 => prudent valuation. 95p/share for renewables pipeline: Ex-assets under construction, SSE has 6.8GW of offshore projects in late/early-stage development and 8.7GW of future prospects. We are cautious in the value we attribute, including 11.6GW (75%) at £0.09m/MW, £1,048m in total (Figure 4). AR5 flop overblown: CfD Allocation Round 5 was a flop for offshore wind, impacting sentiment. The risk for a developer is an adverse cost (capex/finance) shift post securing an offtake contract, but this is not the case for SSE’s development pipeline, and, by implication, the pipeline we attribute value to. Banks deal a positive read across: We argue that Brookfield's acquisition of Banks renewable division is a positive read across to pipeline value. Regulatory protection against rising rates: Network regulation, which includes indexation of both cost of debt and cost of equity, coupled with five-yearly resets, offers some protection against movements in the risk-free rate.
Flexible thermal assets have continued to perform well. Reflecting SSE’s strong, balanced business model, a reduced renewables performance is compensated for by increased thermal output. NZAP Plus plan. We reiterate our Buy rating.
Still guiding to FY24 adjusted EPS of more than 150p The lower power price environment and more stable market conditions are expected to continue for the remainder of FY24 but SSE is still guiding to adjusted EPS of more than 150p, citing its balanced portfolio of assets across electricity networks, renewables, flexible generation and storage. Updated guidance will be provided later in the year. For 1H24, SSE expects to report adjusted EPS of at least 30p, largely reflecting the normal seasonal nature of operations that deliver the majority of annual earnings in the second half of SSE's financial year. 1H guidance takes into account renewables performance which remains below expectations, with output around 19% behind plan for 1H, mainly due to adverse weather conditions. This represents a c.7% shortfall relative to FY planned output. A more stable market environment is expected to drive a seasonal half-year loss for gas storage, before reverting back to a profit for the full year when gas is withdrawn. Flexible thermal assets have continued to demonstrate their value to the energy system in 1H. Strategic highlight snapshot Strategic progress includes four large onshore wind projects in CfD AR5 (605MW receiving 15-year contracts with a strike price of £52.29/MWh (2012 prices)), finalising the commissioning of Seagreen, expecting first power on Dogger Bank in the coming days, all 103 turbines installed at Viking onshore wind farm, securing development and planning consent for Eastern Green Link 2, regulatory approvals under LOTI for transmission links to Orkney and Skye, confirmation from UK Government that the Acorn and Viking CCS clusters in Scotland and North East England have been selected to progress as Track 2, and commencement of construction in France of the 28MW Chaintrix onshore wind farm.
SSE reported higher than expected FY22/23 earnings with SSE Thermal as the main contributor. The business unit tripled its operating profit from £300m to more than £1bn propelled by price, volume and perimeter effects. The group nevertheless indicated that this level of income will be adjusted downwards to around £750m in the following year.
A lot to digest from SSE''s results and strategy update and several significant guidance hikes - some explained by already-known strong recent FCF and balance sheet position, but nonetheless more than justifying today''s share price outperformance in our view. We see relevant readacross for RWE in updated gas generation guidance and for Orsted in comments on renewables value creation. But we continue to see SSE multiples as stretched after accounting for total debt, and remain at Neutral. All of today''s (many) updates in a paragraph 1) FY23 EPS in line with the pre-close update in March, 2) new FY24 EPS guidance 5% above Bbg consensus, 3) new FY27 EPS CAGR implies c187p EPS by FY27E vs. prev. guidance 121p by FY26, 4) DPS growth target increased to 5-10% pa to FY27 vs. prev. 5% growth to FY26, 5) now guiding to 3.5-4x ND/EBITDA by FY27 vs. prev 4.5x by FY26, 6) no longer selling minority in electricity distribution, 7) higher renewables capacity and RAB targets, and finally the only substantive negative adjustment, 8) slightly lower IRR-WACC spread target for renewables. Flexible generation guidance the key takeaway for us There was more to the presentation than can be covered in a page, but the most interesting update for us was on thermal generation, where SSE are now guiding to average sustainable EBIT of c.GBP500m/pa, roughly quadruple pre-COVID/Ukraine levels. This adds weight to the thesis that flexible generation is seeing structurally higher profitability, with relevance across the sector in our view. Trimming value creation targets, in contrast to most peers SSE has adjusted downward its overall renewables IRR-WACC spread target from 100-400bp previously to 50-300bp today. Drivers were cited as higher competition, a higher cost of debt and a mix effect from more lower-spread solar. This is notable as most peers have held firm in their value creation guidance despite these factors. Client feedback has been mixed with some seeing this as...
Guidance for FY24 is for adj. EPS of “more than 150p”, which compares with our current forecast of 155.8p. SSE has upgraded its 5-year CAGR expectations to 13-16%, from 7-10% previously. We maintain our forecast of an 18% CAGR over the period, as set out in our initiation report.
FY23 results beat consensus, EPS in line with SSE guidance Adjusted operating profit of £2,529m (INVe £2,427m, consensus £2,326m), adjusted EPS of 166p (INVe 160.4p, consensus 156p, SSE guidance ‘more than 160p’), and DPS of 96.7p (INVe 95.6p, consensus 95.8p). Adjusted net debt of £8.9bn (INVe £8.6bn, consensus £8.7bn). At a business unit level, as far as the material contributors are concerned, SSEN Transmission reported adjusted operating profit of £373m (INVe £379mm), SSEN Distribution reported adjusted operating profit of £382m (INVe £373m), Renewables reported adjusted operating profit of £580m (INVe £583m), Thermal reported adjusted operating profit of £1,032m (INVe £945m), and Gas Storage reported adjusted operating profit of £212m (INVe £226m). A presentation will be held at 10am (REGISTER). Big upgrade in NZAP, now NZAP Plus SSE expects FY24 EPS of at least 150p, above our estimate of 140p (consensus 141p). We suggest consensus upgrades are likely. SSE has advanced the NZAP programme to NZAP Plus and rolled targets to 2027. Capex plan now £18bn, a 40% uplift on the previous plan, with adjusted EPS CAGR of 13-16% off a FY22 base of 94.8p, a significant upgrade vs. 7-10% off a FY21 base of 87.5p (Figure 1). The rebase of the dividend to 60p in 2023/24 is confirmed, with annual growth of 5-10% targeted through to 2026/27. Previous guidance was for 5%+ growth for FY25 and FY26, and mid-single digit growth thereafter. SSE appears to have paused the sale of 25% of SSE Distribution: “SSE's conclusion that retaining 100% ownership of SSEN Distribution is the right strategy at this time”.
Barry O’Regan to become CFO on 1st December Barry O'Regan will be appointed as CFO and as an Executive Director of SSE, effective 1st December 2023. Barry will also join SSE's Group Executive Committee from the same date. SSE’s incumbent Finance Director Gregor Alexander will step down from the board on the same date, before retiring and leaving SSE at the end of March 2024. Barry is currently Finance Director of SSE Renewables as well as having responsibility for corporate finance across the whole of SSE Plc. He trained as a chartered accountant with PWC in Dublin before joining Airtricity in 2005, and subsequently the SSE Group in 2008. He has experience across financial control, corporate finance and M&A, treasury, reporting and operational finance, and of working with SSE's credit rating agencies. He has also led the execution of many acquisitions and divestments, including SSE's international expansion. As part of the transition, Gregor's current responsibilities for SSE's IT and General Counsel teams will be transferred to the CEO, with procurement transferred to the CCO. We wish Gregor well Gregor Alexander joined SSE at its inception in 1998 and has been Finance Director since 2002. He will continue in his positions as Chair of SSE Transmission's board and as a director on the board of Neos Networks Limited, SSE's joint venture with Infracapital Partners. We wish him well in his future endeavours.
Following last week’s trading statement, we have updated our estimates. A number of moving parts see our FY23E EPS increased by 3.8% to 160.4p, consistent with SSE’s ‘more than 160p guidance’. The bridge between our updated and previous estimates is set out in Figure 2 overleaf, but of note are a continued strong performance from flexible thermal plant offsetting lower than planned renewables output, higher underlying financial charges, and a lower tax charge, with the Electricity Generator Levy expected to be included as an operating cost. These granular changes also impact the detail of our medium-term estimates (Figure 5), although at a consolidated level, we model little change, with FY24E EPS nudged up by 3.6%, and FY25E nudged up by 1.1%. There are moving parts in our valuation, but each component in the bridge (Figure 4) moves by c.2% or less of our previous group valuation. We make no change to our target price which remains at 2,120p, implying a potential total return of c.22%. Likewise, there is no change to our positive thesis on SSE. We continue to see a clear need for investment in renewables and networks in GB, and consider SSE well placed to benefit from this direction of travel.
FY23 results will be announced 24 May 2023. We will likely increase our FY23E forecasts in the light of the new guidance, which could lead to a marginal increase in our 2,060 target price. We maintain our Buy recommendation.
Steady operational performance – As previously disclosed, IGas’ net production averaged 1,898boepd in 2022. IGas has also reiterated guidance for 2023 at c.2kboepd and operating costs of c.$41/boe (FX rate of £1:$1.23), as the company continues to invest and bring production online against the c.7% natural decline of the portfolio. Following the successful production drive initiated in October last year, IGas plans to continue investing across the portfolio, with a new well at Corringham adding high margin barrels and Bletchingley also adding additional revenue. Financials robust – IGas exited 2022 with a cash balance of £3.1m and net debt of £6.1m, down c.£6m in the year. The company has guided to 2023 capex of £15.3m, as the company continues its production drive with a focus on value-add and high-margin projects. We expect this to be a capex heavy year, alongside abandonment costs of £6.5m; however, we anticipate that this will decrease in FY24E with an additional rig purchased, bringing down costs. Geothermal progress – We expect news imminently from the GHNF (Green Heat Network Fund), where IGas and SSE jointly applied for grant for the Stoke-On-Trent project. Success in funding could finalise discussions for a TPA (thermal price agreement) for the offtake of geothermal. The company is also awaiting news from the Carbon Energy Fund (CEF), where it has five bids for funding to supply renewable heat to NHS Trusts. An announcement is expected in Q2 this year. Overall, the company has 35 active projects in discussions with partners, which demonstrates the significant opportunity. Star Energy – IGas has proposed a name, change given its strategic direction to contribute to a lower carbon economy, subject to approval at its June AGM. Valuation – We refresh numbers for today’s results, noting a marginal increase in our RENAV, and we reiterate our Buy and 45p TP.
We initiate coverage with a Buy rating and a 2,060p target price, based on a sum of the parts valuation. The company trades at a P/E adjusted of 11.5x and EV/EBITDA of 8.1x our FY23E forecasts (with a 5.6% dividend yield) at a discount to its peer, National Grid, at 15.1x and 12.9x respectively. Please click below to listen to Nick and John discuss the report
Following last week’s trading statement, and the changes to the Electricity Generation Levy (EGL) announced pre-Christmas, we have updated our estimates. Plant availability and the broader commodity environment are supportive for both thermal generation and gas storage, and we move our estimates up for both. Renewables moves the other way, with output c.10% below plan in the nine months to 31st December. Together these see a material uplift in our EPS estimate for FY23E (+22.5%) to 154.5p, consistent with SSE’s ‘more than 150p’ guidance. FY24E (+0.9%) and FY25E (+1.3%) benefit from tweaks to finance charges, and changes to the EGL (Figure 5). The above flows through to our valuation, and we nudge our target price up to 2,120p, implying a potential total return of c.25%. We continue to see a clear need for investment in renewables and networks in GB. SSE is well placed to benefit from this direction of travel, and we view Ofgem’s pre-Christmas decision to implement a new Accelerated Strategic Transmission Investment (ASTI) regulatory framework as evidence of a regulatory tailwind. The framework initially applies to c.£20bn (2021/22 prices) of onshore investment across 26 projects (Figure 4), with these exempted from competition, and subject to a new reward/penalty ODIs. The ASTI framework is likely to see a material uplift in totex allowances. For SSE, we estimate that this could be £7-8bn (2021/22 prices), with c.85% in RIIO-3. This is not included in our estimates, but we suggest that the inclusion of ASTI projects in totex allowances could be value-accretive to SSE, conservatively adding c.4% to our SOP.
Scottish and Southern Energy Plc reported a very encouraging Q3 trading statement for 2022/2023, highlighting an adjusted earnings per share of more than 150 pence, higher than the expected 120p. The Scottish group confirmed that it is on course to deliver a record year in terms of investment of at least £2.5bn, and its resilient and robust business model.
FY22/23 EPS guided to 150p+ vs. 120p+ previously In an unplanned trading statement, SSE has upgraded its current expectations for full-year 2022/23 adjusted EPS to more than 150p vs. previous guidance of at least 120p (INVe 126.1p). The update reflects the business mix of regulated and market-facing businesses, with continuing good availability and supportive market conditions leading to flexible generation plant and gas storage optimisation, significantly offsetting lower than planned renewables output (10% below plan) and hedge buy-back costs. Additionally, it reflects a narrower range of probable financial outcomes, with the decrease in risk from recent falls in forward power and gas prices and further clarity over the Electricity Generator Levy both reducing uncertainty in the financial outlook as the year has progressed. Markets are still volatile, and plant availability, weather conditions, and the extent to which market conditions lead to further optimisation of flexible generation plant, will determine the final full-year outturn. SSE will next update on 30th March. Dividend policy reiterated The dividend policy of a full-year dividend of 85.7p per share plus RPI for 2022/23 (INVe 95.6p), followed by a rebase to 60p in 2023/24 to support SSE's significant investment and growth plans, has been reiterated. The dividend is then expected to increase by at least 5% per annum in 2024/25 and 2025/26. ASTI benefits SSE too We have previously written about how Ofgem’s Accelerated Strategic Transmission Investment (ASTI) puts some ‘spumante’ into National Grid, and the same holds true for SSE. We note that the trading statement alludes to ASTI. In the near term, SSE has reiterated that capex in FY22/23 is expected to top £2.5bn, our pre-existing estimates of £2.57bn being consistent with this element of the guidance.
Little change to our EPS estimates for FY23E (-1.9%), and FY24E (-3.1%), but this masks many moving parts. Under-recovery in networks, lower output but higher prices in renewables, an increased contribution from thermal and gas storage, the Electricity Generator Levy, and the disposal of a 25% stake in transmission. Broadly in-line with consensus in each year (Figure 7). SSE estimates that the gross RAV for transmission could exceed £12bn by 2031 (Figure 1), c.85% above the level in our estimates, a function of projects yet to be approved. Approval, which is now more likely, following Ofgem’s ASTI decision, points to a likely source of incremental multi-year growth. In renewables, our estimates point to 6.9GW of capacity at FY26E vs. SSE’s 8GW (Figure 4). Consequently, our capex assumptions are below SSE’s (£4.3bn vs. £5bn), although the higher power price environment sees our EBITDA CAGR to FY26E for renewables comfortably above SSE’s >12% expectation. Our modelling approach for transmission is to use the Ofgem PCFM, and we include large renewables projects when there is more clarity on timing and contractual arrangements, and this feeds through to our valuation, albeit that we include an allowance for the renewables pipeline. Our valuation point is rolled over to FY24E, and moves up to 2,104p from 1,920p (Figure 10). In part, this is due to a lower WACC (4.64% vs. 5.05%), but it also reflects the latest Ofgem models, the ED2 Final Determination, and higher power price assumptions for merchant renewables. Our valuations suggest FY24E premia to RAV of 37% and 42% for transmission and distribution respectively. Our target price moves up to 2,100p. BUY.
Scottish and Southern energy beat estimates over the period, amidst soaring energy prices and higher thermal generation and gas storage. The Networks segment also played its part with the increasing number of new generation assets connected to the grid. The group confirmed the full year guidance from May 2022, with at least 120p expected, and also renewed its ambitious investment plan by investing four times more than it makes in profits to boost UK energy security and sustainability.
1H in-line, but moving parts Adjusted operating profit of £716m (vs. INVe £735m) and adjusted EPS of 41.8p (vs. INVe 40.6p, and in line with guidance of “at least 40p”). As can be seen in Figure 1 overleaf, there are many moving parts that have contributed to a broadly in-line outturn. In particularly, we highlight renewables which was impacted by volumes 0.5TWh (13%) below plan, the need to buy back hedges, and delays to Seagreen (now expected to complete in summer 2023) with a cost impact of £57m. Gas storage, however, performed strongly given the volatile gas market, and SSE has indicated the assets “remain well placed to capture the usual winter spread”. In thermal, higher volumes & prices, as well as balancing market performance offset the need to buyback hedges. Net debt incl. hybrid of £10bn was in line with our £10bn. DPS of 29.0p was slightly ahead of our 28.5p given SSE’s assumption of 13.7% RPI. SSE’s guidance for FY23 EPS remains “at least 120p”. Our pre-existing FY23E EPS is 128.6p. The commitment to the RPI-linked dividend growth through to March 23 is reiterated. SSEN Transmission stake sale imminent SSE continues to forecast adjusted EPS CAGR of 7-10% to March 2026, after assumed minority interest. Our pre-existing estimates point to 10.7% EPS CAGR over this period. There is no change in the FY24 dividend rebase to 60p, followed by 5%+ growth thereafter to March 2026. SSE is progressing the sale of 25% minority stake in SSEN Transmission, with completion expected in the coming weeks.
We have updated our estimates following SSE’s pre-close statement, and last week’s announcement that the corporation tax rate will remain at 19% in April. Many moving parts, with FY23E EPS cut by 7% to 128.6p (Figure 1), but still consistent with SSE’s guidance of ‘at least 120p’. 1H23 are due on 16th November, and we set out our granular estimates (Figure 2). Our EPS estimate of 40.6p is consistent with SSE’s guidance of ‘at least 40p’. The utter chaos that has followed last Friday’s mini-budget has heightened political uncertainty, and created open goals for Labour tap-ins. Many will argue that this is utility-unfriendly, but regulatory mechanisms offer protection through the cost of capital formation, indexation, and frequency of resets. Volatile gilt markets make it likely that we will need to revisit our RIIO-ED2 cost of equity estimate again in the run-up to December’s final determinations, but reflecting current conditions, we now model an allowed cost of equity of 5.34% CPIH real, up from 4.95%. Labour’s plans for a zero-carbon electricity system by 2030 are extremely ambitious, not least due to the complexities of planning, and likely supply chain challenges with the western world chasing the same ball. That said, the ambition should be applauded, and if it removes planning bottlenecks, and expedites regulatory processes, we argue that this is positive for SSE’s direction of travel. The benefits of a 19% tax rate, and our higher allowed cost of equity assumption, offset a higher WACC (5.1% vs. 4.8%), and our target price nudges up to 1,920p. Macro chaos has created an attractive entry point. BUY.
EPS guidance remains at least 120p The output from SSE Renewables' assets from 1 April to 22 September was c.13% below plan, and mainly due to weather. However, good performance from gas storage and flexible thermal has continued in volatile market conditions. SSE has indicated that it is performing well in the volatile market conditions, although continuing market uncertainty and liquidity, a fast-moving policy environment, weather variability, plant availability and the complexity and scale of large capital projects are risks that require careful management. First power from Seagreen, Scotland's largest and the world's deepest tethered offshore wind farm, was delivered in August 2022, but there have been delays in completing the commissioning of the Keadby 2 CCGT, now expected to be available later this winter. Despite the current highly changeable market environment, and the resultant wide range of potential financial outcomes from volatile future commodity prices, SSE's original full-year guidance of adjusted earnings per share of at least 120p remains unchanged. An update will be provided in November. Our pre-existing estimate is 138p. For 1H23, SSE expects to report adjusted EPS in the range of at least 40p. Adjusted net debt is expected to be around £10bn at 30th September 2022, with a high proportion held at fixed rates. Our FY23E adjusted net debt is £10bn.
Delivering net zero in GB will require significant renewables build, in turn driving a need for substantial transmission investment. On both fronts, a large part of this will be in SSE territory (Figures 1, 3). Ofgem is consulting on accelerating investment in onshore electricity transmission, including a targeted exemption from competition. A decision is expected later this year (Figure 2), a potential catalyst for SSE. SSE estimates that the gross RAV for transmission could exceed £12bn by 2031 (Figure 4), c.80% above the level in our estimates, a function of projects yet to be approved. Approval would be a source of likely multi-year growth. A similar picture exists in renewables. Our estimates point to 6.9GW of capacity at FY26E (Figure 7) vs. SSE’s 8GW (Figure 8). Consequently, our capex assumptions are below SSE’s (£4.3bn vs. £5bn), while our 5-year EBITDA CAGR to FY26E for renewables is 11.1%, slightly lower than SSE’s >12% expectation. The longer-term pipeline (Figure 9) and build aspiration (Figure 8) points to further capacity expansion beyond 2026, expansion that represents upside to that currently assumed in our modelling. Our modelling approach for transmission is to use the Ofgem PCFM, and we include large renewables projects as there becomes greater clarity on timing, and contractual arrangements. Likewise, our approach to valuation is similar, albeit that we include an allowance for renewables pipeline (Figure 11). Increasing visibility from Ofgem, and progressing renewables projects along the development pipeline, are likely sources of value, optionality that we believe is not captured at the current share price. Target price at 1,900p, BUY.
Q1 slightly ahead of expectations, EPS guidance remains ‘at least 120p’ Q1 performance has slightly exceeded SSE’s expectations, with renewables output slightly ahead of plan (105% of planned output), driven by onshore wind and conventional hydro. Thermal output is also slightly up vs. the corresponding period last year. No change to FY23 guidance, with SSE expecting to report full year adjusted earnings per share of at least 120p and adjusted capital expenditure and investment in excess of £2.5bn. Our adjusted EPS estimate for FY23E is 138.2p, with our capex estimate at £2.53bn. SSE Transmission stake disposal under way, REMA welcomed The formal process for the disposal of a 25% minority stake in SSEN Transmission is now under way, in line with the narrative outlined in May’s FY22 results. SSE has targeted an agreed sale by the end of the calendar year, with completion following receipt of regulatory approval. SSE has welcomed the recent BEIS Review of Electricity Markets Arrangements (REMA) consultation, believing that an orderly consultative process is the right way to deliver the necessary investment. This chimes with our view that REMA is unlikely to see knee-jerk rushed changes.
Estimates updated to reflect recently announced acquisitions (SGRE, Triton Power), CfD Allocation Round 4 results (SSE awarded 220MW for Viking at £46.392012/MWh), and FY22 results. Our estimates include £10.3bn of investment over 2021-26, lower than the £12.5bn set out in SSE’s Net Zero Acceleration Programme. We outline the differences in Figure 2, but these are largely due to projects on which SSE is still to achieve consent, or in the case of transmission, yet to be captured by the RIIO AIP process. We see upside risk to our modelled levels of investment. Our FY23E EPS moves up significantly to 138.2p (Figure 1), with generation accounting for the largest component of the uplift (Figure 3). In turn, this is due to higher estimates for thermal, with SSE guiding to a level of adjusted EBIT of at least £337m ex. Keadby. We estimate £377m including Keadby and Triton. SSE’s guidance for 2022/23 is for adjusted EPS of at least 120p, and our estimate sits ahead of this. We note that consensus is at 116.2p, and suggest that we will see upwards revisions in due course. SSE’s guidance for adjusted EPS CAGR over the five-year period to 2025/26 is a range of 7-10%. Assuming a disposal of 25% of the networks business at a 40% RAV premium, we are slightly above the upper end, at 10.6%. Our target price moves up to 1,900p/share with generation the biggest component of the uplift (Figure 5), albeit with a 24bp uplift in WACC limiting the increase. The possibility of a windfall tax on electricity generation, a misguided policy option in our opinion, has been shelved for now, and transformative changes under REMA are likely to take time. We remain attracted to SSE’s equity story, and reiterate our BUY rating.
SSE Thermal & Equinor to acquire Triton Power in £341m deal SSE Thermal and Equinor have entered into an agreement to acquire Triton Power Holdings Ltd from Energy Capital Partners for a total consideration of £341m shared equally between the partners. Triton Power operates Saltend Power Station (1.2GW CCGT (Combined Cycle Gas Turbine)) and a CHP (Combined Heat & Power) power station located on the north of the Humber Estuary. The portfolio of assets being acquired also includes Indian Queens Power Station, a 140MW OCGT in Cornwall, and Deeside Power Station, a decommissioned CCGT in north Wales which provides carbon-free inertia to the system. Following completion of the transaction, expected in September subject to UK National Security Filing and EU Merger Control, SSE Thermal and Equinor will jointly own and run Triton Power on a 50:50 basis Eye on the future, but flexibility of value to the system in the near-term Saltend Power Station is a potential primary offtaker to Equinor's H2H Saltend hydrogen production project, the latter part of the East Coast Cluster, one of the UK's first carbon capture, usage, and storage clusters. This acquisition strengthens SSE Thermal and Equinor's portfolio of joint projects, including Keadby 3 Carbon Capture Power Station, Keadby Hydrogen Power Station, and Aldborough Hydrogen Storage. The two companies are also developing Peterhead Carbon Capture Power Station. Although the acquisition will bring additional emissions onto SSE's greenhouse gas emissions inventory in the short term, SSE will not rebase its existing Science-Based Targets for 2030. The operational power plants also provide much needed flexibility to the GB electricity system, where security of supply is a growing concern.
A strong set of results from SSE that both beat expectations for the FY21/22 results and increased mid-term guidance by FY26. The thermal fleet obviously recorded very strong earnings but a material acceleration in networks, more sustainable, is a positive. The dividend also came in higher-than-expected, at 85.7p. However, the threat of a windfall tax in the UK is beginning to emerge. Even if only at the rumour-stage for now, the risk is high and potential impacts could be material.
SSE announces FY22 results on 25th May. A presentation/Q&A will be held virtually, and we await access details. Our detailed forecasts are set out in Figure 1 overleaf, with our estimates for SSE’s key metrics being underlying profit of £1,506m (flat vs. FY21), and underlying EPS of 93.3p (+6.7%). SSE’s guidance for FY22 EPS of 92-97p puts us in the lower end of the range, suggesting that we might turn out to be slightly light on adjusted operating profit. In a group of many moving parts, the likely interplay is between networks/renewables on the positive side, and thermal working the other way. SSE has guided to adjusted net debt below £9bn. Our estimate for this metric is £8.7bn. SSE’s dividend policy is 81p plus RPI for 2021/22. Our published estimate for the dividend per share is 87.4p (+7.9%), but with average RPI in 2021/22 of 5.8%, a dividend in the region of 85.7p looks more likely. Of the many issues that face SSE, which we suggest warrant discussion, we flag: exposure to inflation (we see this as a positive); the upcoming draft determinations for RIIO-ED2 (possibly as early as next month); the ongoing CfD Allocation Round 4 process; commodity price exposure in renewables capex; the £12.5bn Net Zero Acceleration Programme; and progress towards the disposal of a 25% minority stake in the networks business. We maintain our view that SSE is well positioned to benefit from the broader push to electrify and decarbonise, and see this as a multi-annual growth opportunity. BUY.
SSER to acquire SGRE’s European renewable energy development platform SSE Renewables (SSER) has entered into an agreement with Siemens Gamesa Renewable Energy (SGRE) to acquire its existing European renewable energy development platform for a consideration of €580m. The transaction is expected to complete by the end of September 2022, subject to receipt of relevant foreign direct investment and regulatory approvals. The SGRE portfolio includes c.3.9GW of onshore wind development projects – around half of which is located in Spain, with the remainder across France, Italy and Greece – with scope for up to 1GW of additional co-located solar development opportunities. SSE Renewables will also take on a team of around 40 employees with vast experience in the sector. An agreement between Siemens Gamesa and SSER, which includes certain partnership rights for the supply of wind turbine generators and long-term maintenance services, has also been signed by the parties for a portion of wind farms installed and operated by SSER in the next few years coming from the to-be-acquired portfolio. Aiming to have 500MW from the SGRE portfolio operational by March 2026 SSER is aiming to have around 500MW of renewable projects from the SGRE portfolio operational by March 2026, with at least a further 500MW in construction. It is not clear from last night’s communication how much of the pipeline to be acquired has the necessary permissions to begin construction, and how much has secured support under the remuneration schemes on offer. The addition of the SGRE platform is consistent with the SSE Group’s Net Zero Acceleration Programme, which targets: (i) 4GW of net additions over five years, doubling installed renewables capacity to 8GW (net) by 2026; (ii) maintaining a pipeline of at least 15GW of renewables development projects; (iii) targeting delivery of at least 1GW net capacity additions per year during the second half of the decade; and (iv) trebling installed renewables capacity to over 13GW (net) and in turn targeting a five-fold increase in renewables output to 50TWh annually by 2031.
SSE has upgraded FY22 adjusted EPS guidance to a range of 92-97p/share, up from at least 90p/share previously. Q4 renewables output sees the output shortfall vs. plan narrow to 12% from 19% at 31st December, while the good performance of flexible thermal/hydro continues in volatile markets. Our FY22E for adjusted EPS is 93.3p. There is no change to the dividend policy, and year-end net debt is expected to be below £9bn (INVe £8.7bn). BUY. Weather conditions have improved since SSE’s Q3 trading statement on 8th Feb, with the shortfall in renewables output vs. plan now 12% vs. 19% for the nine months to 31st December 2021. The good performance from flexible thermal and hydro plant has continued in volatile market conditions, demonstrating the need for such assets. Against this backdrop, SSE has increased FY22 adjusted EPS guidance to a range of 92-97p vs. at least 90p previously. Our estimate for FY22 adjusted EPS is 93.3p, within SSE’s guided range. SSE still intends to recommend a full-year dividend of 81p per share plus RPI for 2021/22 and continues to target an RPI linked dividend in 2022/23, followed by a rebase to 60p in 2023/24 and at least 5% increases in 2024/25 and 2025/26. SSE also remains on track to report full-year 2021/22 capex in excess of £2bn (we have £2.01bn) as it executes its strategic £12.5bn Net Zero Acceleration Programme. The disposal of Scotia Gas Networks has completed, and SSE expects adjusted net debt to be below £9bn at 31st March. Our estimate is £8.7bn. FY22 results will be published on 25th May.
Last November SSE set out its Net Zero Acceleration Programme (Figure 1), alluding to significant opportunities in generation (renewables & thermal), and networks. We opined at the time that the big picture was clear, while subsequent events, and an increasing emphasis on energy independence and electrification are hugely supportive of SSE’s strategy and positioning, in our view. We remain cognisant of the fact that SSE’s plans involve uncertainty mechanisms in networks, the outcome of the RIIO-ED2 regulatory process, the disposal of a minority stake in the SSEN networks business, and farm-downs in offshore wind. As the timing and quantum of proceeds are uncertain, as well as allowed ED2 totex, and uncertainty mechanisms across the network business, we do not present our estimates on the same basis as SSE’s plan. Reconciling, our estimates include c.£8bn of consolidated capex to which a net c.£2.9bn of project finance investment less assumed OFTO proceeds should be added. SSE’s plan also includes c.£2.5bn for thermal/other. Adjusting for a sale of 25% of networks at end FY23 suggests c.£12.8bn of net investment to FY26E pre farm-downs, broadly consistent with SSE’s plan. Our updated estimates (Figure 5, Figure 11), presented on the basis of 100% network ownership throughout, suggest EPS CAGR of 7.3% through to FY26E, above SSE’s guided 5-7% range. Assuming the disposal of 25% of networks at a 40% premium to FY23E RCV would reposition our estimates to show c.6.1% growth over this period, in line with SSE’s guidance. Our updated valuation reflects many moving parts, including higher power prices and a higher WACC (4.5% vs. 3.6%), but rises to 1,855p (vs. 1,800p). A supportive political backdrop/broader narrative sees us remain BUYERS.
In a context of adverse weather conditions for renewables leading to low output (-15.6% yoy), SSE has been able to rely on its thermal and hydro assets to benefit from the favourable energy prices and to boost its performance over the first 9M of the fiscal year. As a result, EPS guidance is improved from ‘at least’ 83p to ‘at least’ 90p, ahead of analysts’ expectations. Capex, net debt and dividend are confirmed to be in line with our expectations.
Upgraded EPS guidance SSE has published a 3Q trading statement today, upgrading FY22 adjusted EPS guidance to “at least 90p”, up from “currently expects to report full year adjusted earnings per share at a level which is at least in line with consensus of analysts’ forecasts of 83p (Bloomberg 15 November 2021)” at 1H22 (17th November). Commodity prices have been elevated & volatile, with high prices in the balancing market, and SSE has alluded to good financial performance from its flexible thermal and hydro plant, more than offsetting lower than planned renewables output (onshore wind 79% of planned output at 12/21; offshore wind 83% of planned output at 12/21). SSE continues to guide to >£2bn capex for FY22, and year-end net debt is expected to be c.£9bn assuming SGN proceeds are received. This is higher than the £8.4bn in our pre-existing estimates, although we note our FY22E capex estimate currently stands at £1.9bn. Progress in networks and offshore wind NGESO’s Networks Options Assessment published on 31st January indicated the need for more than £5bn investment in transmission in the North of Scotland. This is supportive of RAV growth in SSE’s transmission business. With its JV partners Marubeni and Copenhagen Infrastructure Partners (CIP), SSE successfully bid for the E1 East site (potential capacity of at least 2.6GW / 1GW net) in the ScotWind seabed leasing auction. This takes SSE's current secured pipeline to around 11GW with further opportunities in development to grow this to the sustained 15GW target. Refreshed 2030 business goals SSE has refreshed its four core business goals for 2030. The refreshed goals are to reduce Scope 1 carbon intensity by 80%; build a renewable energy portfolio to generate at least 50TWh; enable 20TWh of renewable generation, 2m electric vehicles and 1m heat pumps on its transmission and distribution networks; and champion a just energy transition throughout.
Capex acceleration for the net zero goal without breaking up company SSE''s strategy update relies on a major (net) Capex increase to GBP12.5bn in 2021-26 (vs GBP7.5bn in the previous plan). Capex will be devoted to Renewables (40%), Networks (40%) and Thermal and Other (20%). SSE aims to double its renewable capacity to 8GW while maintaining a stable 15GW pipeline by FY25. The intention is also to increase its RAV by 10% CAGR. SSE management announced its decision not to break up the company since the current structure (vertically integrated utility) is seen as optimal to pursue growth, execution and value creation. How to fund such an ambitious plan The ambitious cash requirement (GBP12.5bn capex, GBP3bn dividend and GBP3bn Interest and Tax) is expected to be largely funded with c. GBP12bn operating CF, GBP4.5bn divestments (SGN, 25% stake sales in Networks and other non-core) while the net gearing should stay at 4.5x ND/EBITDA. We note the updated dividend policy reiterates the existing DPS commitment until 2023 but DPS will be rebased to 60p in FY23 (5% yearly growth to FY26). Returns and growth broadly in line with expectations SSE returns are expected to be at 10% RoE on JV offshore projects, 7-9% RoE in Networks, 100-400bps spread to WACC on unlevered renewable projects and 300-50bps spread to WACC in new technologies. SSE''s growth is expected at 5-7% Adj. EPS CAGR, supported by Renewables (CAGR2021-26e EBITDA 11-12%) and Networks (GBP 7.4bn in FY21 to c. GBP12bn gross by FY26). SSE - An attractive option to play the UK Energy transition We admit the limited visibility and challenges of the new plan, while we continue to see SSE as well positioned to benefit from the UK''s renewable ambitions. The decision not to break up SSE reduces its take-over candidate appeal but SSE (and its shareholders) will continue to benefit from the market appetite for infrastructure and renewables through farm-downs and minority stake sales that will be...
Apart from the H1 21/22 results being in positive territory, SSE particularly disappointed with its new 2026 strategic update. The group intends to invest £12.5bn by 2026 to increase its renewables asset base by 4GW and increase its electricity network RAV to £9bn. This appears conservative, especially with regards to renewables, not to mention that the funding of the plan requires a dividend cut. We would have liked more aggressiveness on renewables. Negative view confirmed.
SSE’s net zero acceleration plan is long on ambition, but a meaningful part of the investment uplift is dependent on regulation, and renewable auctions. A part disposal of networks would likely realise a premium to our valuation, but we see no immediate dial movers. The split debate will likely resurface in the future, and the dividend cut might see some shareholder rotation. Despite this, we continue to see value, with today’s weakness a buying opportunity. A multitude of moving parts, and the acceleration plan set out this morning, means that revising earnings requires in-depth consideration, and not a knee-jerk reaction. However, we see value in elaborating an initial view on the plan. The big picture is clear. As we have said many times, this is the age of electrification, in the UK & globally (Figures 1-2). This supports multiple opportunities across generation and networks, and SSE’s current positioning facilitates opportunity in each (Figures 3-4). A £12.5bn net capex programme to 2026, 65% above the previous plan (Figure 5), includes minority disposals in transmission and distribution, but c.£5bn is dependent on taking FiDs, and regulatory approvals (Figures 6-7). Renewable capacity adds to FY26 are largely domestic, but an international dimension begins to grow thereafter (Figures 8-9). Clear drivers of network investment, but uncertainty mechanisms and the ED2 review will be determinants. SSE’s FY26E RAV (Figures 10-11) is c.15% above our FY26E. Funding the plan (Figure 12) foresees disposals including a minority stake in transmission and distribution, farm-downs in offshore wind, and a dividend cut in FY24 (Figure 13). A c.£4.5bn disposal target (ex-wind) suggests that SSE is very confident of securing a significant premium to RAV and/or bullish about other non-core disposals. Management are adamant that this is “absolutely the optimal plan”, and there is “no other plan out there”, but we suggest that if SSE is successful in building a global offshore wind business, the split question will return to the table.
1H22 in-line, but many moving parts Adjusted operating profit of £377m (vs. INVe £386m) and adjusted EPS of 10.5p (vs. INVe 9.5p, and guided 7.5-10p range). As can be seen in Figure 1 overleaf, there are many moving parts (many of which relate to volatile power/gas markets, and adverse weather conditions in 1H22) that have contributed to a broadly in-line outturn. Net debt incl. hybrid of £9.6bn was closely in line with our £9.5bn. DPS of 25.5p was slightly ahead of our 25p given SSE’s assumption of 5% RPI. SSE has not given guidance on FY22 EPS, save to say the expectation is for it to be ‘at least in line’ with consensus of 83p. Our pre-existing FY22E EPS is 83.5p. The commitment to the RPI-linked dividend growth through to March 23 is reiterated. Shifting towards renewables, but dividend to be cut in FY24 to 60p SSE has also announced a net zero acceleration programme of £12.5bn net capex investment to 2026, representing a 65% step-up in annual investment (£1bn additional capital investment per year) on its previous plan, and with over 2.5 times more capital now allocated to renewables growth. SSE has indicated that the investment will deliver c.4GW net renewables capacity additions, and grow electricity networks underlying RAV to c.£9bn net of assumed 25% minority stake sales in both SSEN Transmission and SSEN Distribution (SSE’s modelling assumption is early FY24). Across the three principal business areas, capital allocation will be c.40% Networks, c.40% Renewables, c.20% other flexible generation, distributed energy and customer businesses. SSE forecasts adjusted EPS CAGR of 5-7% to March 2026, after assumed minority interest, higher than the 1% we have in our pre-existing estimates. However, the dividend will be rebased in FY24 to 60p, followed by 5%+ growth thereafter to March 2026.
SSE has already guided to 1H adjusted EPS of 7.5p-10p… SSE reports 1H22 next Wednesday (presentation at 8.30am). As indicated in the recent pre-close statement, weather conditions have been extremely unfavourable to renewables in the 1H, with output down 32% in the period to 22nd Sep, an 11% impact on the FY forecast output. High wholesale prices will have most likely offered profitable opportunities for SSE’s thermal fleet in the short-term markets, although in 1H this will have been impacted by outages. The environment for gas storage is likely to have been favourable. SSE has guided to 1H adjusted EPS of 7.5p-10p, our estimate being 9.5p. …Dogger Bank C sell-down and thermal optimisation opportunities should help offset 1H renewable pain at FY Since the trading statement SSE has announced the sale of 10% of Dogger Bank C, which we suggest will generate a capital gain (recorded with adjusted earnings) of c.£65m in 2H. This, together with optimisation opportunities from the thermal fleet, should over the FY help to offset the c.£120m impact on renewables in 1H. Our pre-existing FY22E estimates are under review, but we suggest many moving parts of opposite directions, rather than uni-directional at a consolidated level. Wednesday is not about 1H numbers, it’s about accelerating investment and value creation on the road to net zero However, the SSE investment case is not predicated on whether the wind is blowing in FY22. This is about a company that is well positioned to benefit from the pathway to net zero in 2050, where electrification towers above all other drivers. This manifests itself in a need for a significant expansion of renewables (SSE has on/offshore wind pipeline & Scot Wind/CfD AR4 are catalysts), an expansion of long duration storage (SSE has the Coire Glas project), transmission investment to connect new capacity (SSE has island links, and proposed changes to the offshore regime offer opportunity), and investment in distribution from the electrification of heat and transport (ED2 business plans are submitted in December). SSE may hold a different opinion, suggesting that thermal generation offers a further investment opportunity, but we contend that a further streamlining of the portfolio to a complete focus on networks/renewables might be a better use of capital.
Low renewable resource & hedge buy backs impact The output from SSE Renewables' assets from 1 April to 22 September was c.32% or 1.2TWh below plan, representing an 11% shortfall on SSE's forecast total output for the full year, and due to low wind & rainfall. The financial impact appears to have been exacerbated by the need to buy back hedges, and outages (both scheduled & unscheduled) in the thermal fleet. SSE has indicated that it remains confident about delivery of solid financial performance for the full year, although no guidance has been given. For 1H22, SSE expects to report adjusted EPS in the range of 7.5p to 10p. SSE expects to recommend a full-year dividend of 80p plus RPI inflation. Based on RPI of 3.75%, an interim dividend for 2021/22 of 25.3p is expected to be paid in March 2022. In light of the above, we have placed our estimates under review. Eyes on November for growth acceleration SSE will provide an update on its plans to further accelerate growth in its portfolio at 1H in November, including “details of upweighted capital investment for the period to 2026, the sources of funding to underpin the plans, as well as the company's vision for further growth ambitions extending into the 2030s”. SSE enters the Japanese offshore wind market SSE has also announced its entry into the Japanese offshore wind market through the creation of a new offshore wind joint ownership company with Pacifico Energy, one of Japan's largest developers of renewable energy. This includes the acquisition of an 80% interest in an offshore wind development platform. The acquisition price is $208m, of which $30m is deferred consideration.
The Crown Estate leasing round underscores our view that there is value in SSE’s offshore pipeline; we now attribute value to a broader range of projects. CfD Allocation Round 4 opens in December with key dates now published – we expect SSE to bid. Our thesis of a decade of opportunity in wind remains intact, with the possibility of steady capacity additions over the next ten years. The system needs long duration storage, and pumped storage is nature’s battery. The LLES call for evidence is a positive, and COP26 offers an opportunity for the government to expand the narrative. The CMA’s provisional decision in the RIIO-2 appeals process largely sided with Ofgem, but the likely demise of the outperformance wedge is a positive. SSE’s draft ED2 business plan sets out a 45% totex increase in the base case, although the cost of equity put forward is aggressive. Submission of final plans is in December. SSE reached an agreement to sell SGN quicker than we expected, and at a valuation 39p/share higher than we had assumed in our previous valuation. Recent network transactions (National Grid/WPD, Pennon/Bristol Water, SGN disposal) were at RAV/RCV premia above those in our sum-of-the-parts valuation for SSE’s network activities. Applying a 40% premium would add c.130p/share. Our target price moves up to 1,800p (from 1,675p), with the achieved price for SGN, the likely demise of the outperformance wedge, and a higher value of the offshore wind pipeline the key contributors. This suggests a potential 14% total return over 12 months.
Sale of SGN stake for £1,225m… SSE has agreed to sell its entire 33.3% stake in gas distribution operator SGN to a consortium comprising existing SGN shareholder Ontario Teachers' Pension Plan Board and Brookfield Super-Core Infrastructure Partners. The transaction is based on an effective economic date of 31st March 2021, is for a consideration of £1,225m in cash, and is expected to complete within the current financial year, conditional on certain regulatory approvals. …at a 36% premium to trailing RAV, 40p/share above the value in our SOP SGN had a RAV of £6,003m at 31st March 2021, with the book value of SSE's interest at £744m. SGN contributed £88.6m to SSE's earnings for FY21. The achieved sale price is £421m (40p/share) above the value in our SOP, and represents a c.36% premium to FY21A RAV. Non-core disposal plan concluded, investment update in November This deal concludes SSE's £2bn plus disposals programme announced in June 2020, with total proceeds amounting to over £2.7bn. SSE has indicated that it will provide an update on its investment plans at November’s interim results.
No surprises in Q1 performance As usual for the Q1 trading statement, SSE refrained from providing quantitative assessment of its financial performance with FY guidance set to come later in the year. Operational data provided showed weaker y-o-y wind and hydro performance, in line with our expectations although a shortfall from the company''s FY expectations, given weather conditions. Operational data for electricity distribution showed solid performance and a recovery in electricity volumes vs the COVID impact 2020. Overall, there were no information to cause material moves to consensus estimates on an underlying basis. SGN to be treated as held for sale Following the initiation of the disposal process for SGN, SSE announced that the business will be treated as held for sale in 2021/22. We now model the exit from that business at year-end and assume GBP1.3bn in proceeds to the group. The disposal is ca. 8% EPS dilutive on our estimates but should crystallise value for the group and further increase the group''s focus on Net Zero delivery. SSE targets an announcement on the agreed sale by December-end. Dividend policy out to 2022/23 reiterated SSE re-iterated its commitment to the 5-year dividend policy to March 2023. Given the EPS dilution from the SGN sale and our view of the significant investment growth opportunities that SSE can take advantage of both in its renewables and its electricity networks business, we now assume DPS to remain flat post that 5-year period. We expect the company to provide more clarity on the longer term capital allocation plan at the time of the interim results in November. Reiterate Outperform rating. Our price target remains unchanged at 1766p, which we continue to view as conservative, valuing the electricity networks at 20% premium to RAB and assigning value to just 50% of the company''s offshore wind seabed leases. We continue to rate SSE as one of our top picks in the sector.
Following the disposal of multifuel assets, SEE’s EPS soared by 5.3x for the 2020/21 March-ending fiscal year. £878m extra gains on disposals offset a £170m negative impact on EBIT from the pandemic. The adjusted figures were, however, in line with the consensus, and slightly above our expectations, driven in particular by a strong performance from offshore wind. The long-term guidance was confirmed, but no precise outlook was given for FY21/22. Expect upwards adjustments to our estimates.
In-line FY2020/21 performance COVID19 and wind conditions on the negative side and capital gains on the positive side were the main one-off drivers in the last fiscal year. Operating performance was otherwise as expected and FY EPS of 87.5p stood at the midpoint of the 85-90p guidance. The balance sheet continues to show strength on the back of the disposal program, standing at 4.6x net debt/EBITDA. A newsflow heavy next 6-12 months In November SSE will update the market on its capital investment program, with management already highlighting areas of capex upgrades. Towards the end of the year we also expect the announced sale of SGN (process to launch mid-summer) and the farm-down and FID for Dogger Bank C. Also in the second half of the calendar year we should have the results of the Scotwind seabed lease auction, in which SSE is participating, and the launch of the UK CfD auction, where SSE could participate with the uncontracted portion of Seagreen. Within the next 12 months SSE will also update the market on its longer term dividend policy, with management emphasising today the importance of the dividend to the equity story, and the CMA will publish its final conclusions on the RIIO2 determination. Fine-tuning estimates We update our earnings estimates to reflect the FY results, with corporate costs running higher than our previous forecasts, but also our new, higher, power price assumptions and latest interest rate movements resulting in a +/-3% adjustment to our annual EPS estimates. Re-iterate Outperform We continue to view SSE as the best way to play the UK energy transition with 90% of group adjusted operating profit coming from electricity networks and renewables. Reflecting our latest earnings estimates, higher long-term power prices for the period post CfD expiry and higher cost of capital, we nudge our SOTP PT higher to 1766p, implying ~14% upside from current levels.
Well on track for FY2020/21 targets - FY results due May 26th SSE reiterated its guidance for this year''s EPS to be in the 85-90p range as the COVID19 impact is now expected at GBP180m vs original guidance of GBP150-250m and offsetting the fact that renewables output, due to weather conditions, is 9% below normal vs. a 5% shortfall at the 9M point. Crucially, net debt is guided ca. GBP0.5bn lower than previously, at GBP9bn, helped by FX and better cash conversion. Factoring all these in and further lowering our financial expenses assumption on JV interest expenses, we raise our March-21 EPS by ca. 3%. Equity story playing out In line with our assumptions for National Grid (see: Network reshuffle) we have assumed that the CMA will grant higher return on equity by about 45bps following the appeal of the network operators to OFGEM''s RIIO2 final determination for electricity transmission. We assume 10bps higher return on equity for SSE''s electricity distribution than the level presented by OFGEM on the latest methodology report. We raise our 2022 onwards estimates to reflect these factors, although note that we do not factor in the dilution from the potential disposal of the equity stake in SGN. On May 26th SSE will update the market on that front. Helped also by the lower net debt levels in 2020/21, SSE is well on track to fully capture the investment opportunity in electricity networks and onshore and offshore wind. Reiterate Outperform rating We continue to view SSE as the best placed stock to benefit from the UK''s energy transition plans. The stock is currently not pricing in any value from the company''s renewables pipeline vs what peers price in, which in some cases is above 10 years'' worth of pipeline and is reflecting the value of the electricity networks at 20% premium to RAB with transaction multiples comfortably double that level. We nudge our price target higher to 1760p with higher earnings estimates and lower debt largely offset...
Against the backdrop of clear political desire to deliver Net Zero by 2050, and the central role that energy will play in this, we have revisited SSE, concluding that it has been successful in reshaping and refocussing the portfolio, and is increasingly well positioned to exploit the considerable opportunities that delivering Net Zero is likely to present. SSE has a sizeable visible renewables pipeline that offers a multi-year opportunity for investment and growth, and the continued appetite in the secondary market for assets of this ilk is supportive of its farm-down strategy. Our modelling suggests a 5.6% RAV CAGR in SSE’s networks businesses through to FY26E, with the possibility of additional positive investment opportunities for SSE’s transmission business. Distribution could benefit from the need to deliver a smart, flexible system. Updated estimates reflect the recently announced disposals, and crucially, Ofgem’s RIIO-2 final determinations for transmission and gas distribution. An £80m Covid-19 assumption for FY22E limits our EPS upgrade for this year, but with transmission a key driver, we model earnings upgrades across our forecast period. Driven by renewables, our sum-of-the-parts valuation moves up by 325p, prompting us to increase our target price to 1,670p (from 1,340p). This points to a 12-month potential total return of 15%, which allied with our view that SSE is increasingly well positioned to benefit from the Net Zero pathway, sees us upgrade to Buy (from Hold).
SSE is selling a 10% stake in Dogger Bank to Eni – value above that in our SOTP SSE has entered into an agreement to sell a 10% stake in the first two phases of Dogger Bank Wind Farm to Eni for an equity consideration of £202.5m, subject to adjustments for interest on closing. The disposal is in line with SSE’s strategy of selling down stakes in projects to retain a 30-40% holding, and has achieved a valuation higher than the 57p we have in our sum-of-the-parts valuation. We estimate that this is worth c.14p/share of additional value. FY21 EPS guidance updated, but underlying looks weak vs. our estimates At 1H21, SSE guided for adjusted EPS for FY21 to be in the range of 75-85p including the gain on disposal of an equity stake in Dogger Bank Wind Farm. Our estimate excluding the gain, and that on Seagreen, stands at 78.5p. SSE is now guiding to 85-90p including a 19p gain on Dogger Bank, assuming normal weather conditions for the remainder of the year and an impact from coronavirus towards the middle of the £150-250m range set out in June 2020. Stripping out the 19p gain, and the c.2p gain on the Seagreen disposal would point to adjusted EPS of 64p-69p on an underlying basis, weaker than our 78.5p estimate ex gains. It is unclear as to what extent consensus of 79.7p includes gains, but we suspect that a similar picture might exist in respect of underlying consensus estimates.
UK on cusp of going up the risk-reward ranks for utilities investors The next month could be very important for the attractiveness of UK energy utilities. On the one hand the trade relationship with the EU could provide some visibility and OFGEM''s final determination for RIIO-T2 could determine whether we have seen the trough in regulatory returns. Green Industrial Revolution not waiting In recent research UTILITIES: Capex supercycle we analysed the investments needed across Europe and the UK to deliver on net zero carbon targets by 2050. We also underscored the importance of governments and regulators in providing the visibility needed for these investments to go ahead. We believe the UK government''s 10-point plan for a so called Green Industrial Revolution is a strong step in that direction as is next year''s 4th round renewables auction. Still additional support might be needed from the government and/or consumers for some younger technologies such as floating offshore, hydrogen and biomass carbon capture to be delivered. SSE - a pure play into the UK''s energy transition We nudge our SOTP to 1725p. We believe the market is undervaluing the company''s renewables pipeline and is attaching too much risk on the electricity networks regulation. Our analysis suggests that SSE has the balance sheet capacity to deliver on the trebling of its renewables output by 2030 (with more growth potential thereafter) while growing DPS by inflation, assuming some improvement in the OFGEM final determination vs the draft (4.5% ROE vs 3.95%). Drax - more confidence in post 2027 optionality The government''s inclusion of Bioenergy with Carbon Capture and Storage in its 10-point plan as well the favourable treatment of biomass in the EC''s draft delegated act for the EU Taxonomy has given us more confidence to start pricing in value beyond 2027; the year that support for biomass generation expires in the UK. Our power price assumptions do not support merchant...
SSE PLC Drax Group plc
Making a strong Green case We have argued all year that the investment case for SSE as a pure play on the UK green transition is underappreciated by the market. The management''s H1 presentation we believe went a long way to providing credence to our argument, with details on the renewables pipeline through to 2030 on a day that the UK government unveiled its 10 point Green Industrial Revolution plan. We continue to see scope for OFGEM''s final RIIO2 determination to better capture the network investment needs when it is announced in December. As with our National Grid estimates, we now assume a 4.5% allowed return on equity vs 3.95% proposed at the draft determination. Solid financial performance H1 results were above our estimates and the guidance provided for FY of 75-85p inclusive of the Seagreen and Dogger Bank capital gains is positive. Management suggested that the actual completion of the Dogger Bank sell-down, due by calendar year-end, has scope to provide upside rather than downside to this figure. We include about 8p of capital gain to our estimates. For next year onwards we have modestly increased our estimates on slightly lower financial expenses and better forward hedging. Asset rotation: a value creating strategy SSE''s cash outlay in key renewable projects in the period 2021-25 will amount to about GBP2bn, with returns locked in and set to add ca. 10p to earnings when completed. This is in part financed by the GBP2bn disposal program which is underway and which is guided to cost ~7p of earnings. There is a mismatch in timing, but it is clear that the strategy is value and earnings enhancing and investors are compensated in the meantime through the steadily growing dividend. Reiterate Outperform rating We nudge our SOTP price target higher to 1700p to reflect our updated financial estimates and we reiterate our positive view on the stock ahead of heavy newsflow in the coming months, including the OFGEM review, the Dogger Bank...
SSE announces 1H21 results on Wednesday at 7am (GMT), with a presentation to be held at 8.30am (webcast link). At the adjusted operating profit line, SSE has guided to a 1H impact of £120130m from Covid-19 which we expect to fall in a 30/30/40 split across Distribution/Enterprise/Business Energy, and with renewable output 9% below plan, we look for adjusted operating profit of £428m, 13% down on 1H20. We expect this to feed down to adjusted EPS of 12.5p, at the upper end of SSE’s guided range of 10p-12.5p for 1H. Net debt should benefit from the £350m sale of SSE’s 25% stake in the Walney offshore wind farm, and the Seagreen sell-down, and we look for net debt to dip under £10bn. There should be no surprises on the interim dividend, with SSE having guided to 24.4p/share. We look for updates from SSE on the progress in taking Dogger Bank to financial close, and the gas production and contracting sale processes, as well as observations as to whether there has been traction with Ofgem ahead of final determinations next month for electricity transmission, and gas distribution. We view the strategic narrative and update as more important than the 1H numbers themselves.
Ongoing deleveraging In June 2020 SSE announced a GBP2bn disposal program to clean up the portfolio and free up capital to support the growth investments in networks and renewables as well as to support the dividend growth commitment. GBP1.4bn has already been announced, not only sooner than we were modelling but also bringing in ~GBP400m more proceeds than anticipated. Gas production, Contracting and a minority stake in Dogger Bank are also expected to be sold in the coming months with a possible decision on an exit from SGN also due next year. On our numbers, leverage becomes very comfortable by 2023/24 and potentially sooner if the group continues to outperform on disposal valuations. OFGEM upside possible The draft RIIO2 determination was especially tough not only on allowed returns but also on totex allowances and in-period approvals. It is natural to anticipate some improvement on totex as the utilities would use their follow-up submissions to explain their positions better. In the meantime, the provisional findings of the CMA on the OFWAT review, which has been a key input into OFGEM''s review, provide upside scope on the allowed return as well. We believe the final determination in December could be a positive catalyst, providing regulatory transparency and scope for additional growth in networks and balance sheet deleveraging. This is not reflected in our forecasts. Re-iterate Outperform. SOTP TP 1655p We have updated our earnings estimates to reflect the latest disposals and the company''s trading statement. We have not made any changes to our RIIO2 assumptions. We raise our target price to 1655p to reflect the better sale price achieved from the disposals partly offset by lower earnings estimates reflecting a slightly bigger COVID impact. We view SSE as an undervalued pure play on the UK transition towards a net zero carbon economy.
SSE agrees to sell Multifuel… SSE has entered into an agreement to sell its 50% share in energy-from-waste ventures Multifuel Energy Limited (MEL1) and Multifuel Energy 2 Limited (MEL2) to European Diversified Infrastructure Fund III, an infrastructure fund managed by First Sentier Investors, for a total cash consideration of £995m. The transaction is expected to complete by late 2020 subject to antitrust approval by the EC. MEL1 consists of Ferrybridge Multifuel 1 and 2, both 75MW and operational since 2015 and 2019 respectively. MEL2 is a 45MW development project. All are 50/50 JVs between SSE and Wheelabrator. Both Ferrybridge plants have capacity market contracts for delivery years 21/22, 22/23, and 23/24, with Ferrybridge 1 holding a contract for delivery year 20/21. …we see the deal as valuation positive The transaction is part of SSE’s £2bn disposal programme autumn 2021, and announced transactions now total c£1.4bn. Although we do not explicitly value Multifuel, the value we attribute to the whole of SSE’s thermal generation activities is £996m, so this strikes us as clearly valuation positive. In SSE’s FY20 accounts, Multifuel was held at £58m, with a further £257m in shareholder loans. What’s the ultimate end game? Split possible? Although SSE has not yet provided EPS guidance for FY21, the strategic reshaping is continuing, and there is a positive read-across from the CMA’s provisional determinations in PR19 water appeals to RIIO-2, and governmental support for offshore wind is a positive for SSE’s offshore wind ambitions, albeit we caveat that bidders prevail in auction rounds at prices that deliver economic value. PPL’s planned disposal of WPD will shine a light on network valuations, and infrastructure appetite for renewable assets is clear to see. As SSE reshapes into a network/renewable dual play, should we actually be asking whether the ultimate end game should be a split of those activities, either voluntarily, or via external corporate activity? Could the individual parts be worth more than the whole?
No FY EPS guidance until later in year In its 1H21 trading statement, SSE has indicated that it continues to perform well operationally, and has updated on a few metrics. In line with previous guidance, SSE continues to expect the adverse effects of coronavirus on its 2020/21 operating profit to be in the range of £150-250m before mitigation, with the greater impacts likely to be experienced in the first six months of the financial year, at around £120-130m, none of which will be treated as exceptional. In its Q1 Trading Statement, SSE stated that output from renewable sources was15% below plan for the quarter to 30 June 2020. For the period to 21 September 2020, output is 9% below plan. This shortfall remains 3% of expected annual output. SSE expects to report adjusted earnings per share in the range 10-12.5p for 1H21, vs. 18p in 1H20. With the ongoing uncertainties about the shape of economic recovery and the effects of coronavirus, SSE has not yet provided FY EPS guidance, and intends to do so later in the year. SSE continues to expect to recommend a full-year dividend of 80 pence plus RPI inflation. In line with that, and based on RPI of 1.5%, an interim dividend for 2020/21 of 24.4 pence is expected to be paid in March 2021. Strategy execution progressing SSE is progressing its £7.5bn investment plan, reaching financial close for both the Seagreen offshore wind farm and the Viking onshore wind farm in Shetland. Development of Dogger Bank offshore wind continues, with the process to sell an equity stake under way and confirmation of a contract with GE to supply the ground-breaking 13MW Haliade-X turbines. The project progresses towards financial close. As part of a £2bn capital recycling programme, SSE is selling its financial interests in the Walney offshore wind farm for £350m and has reached an agreement to sell its stake in the meter asset provider MapleCo for around £90m.
A record low allowed return The 3.95% real CPIH base line return on equity, which is post a 25bps expected outperformance wedge, is just under the 4.0% we were assuming in our model and the lowest ever set by OFGEM. Although a sharp cut vs the returns allowed and achieved in the current regulatory period, it is broadly consistent with the prevailing - and historically unique - monetary conditions. Up to 300bps outperformance is allowed before 50:50 profit sharing with customers kicks in. The final determination is due by December 2020 and we expect SSE to argue both for higher returns and higher baseline Totex. It is notable that one of the toughest regulatory reviews coincides with a period of political rhetoric about increased investment requirements (net zero, hydrogen, ''green'' recovery). Politicians across Europe might need to give firmer signals about their commitment towards decarbonisation in order for regulators to reflect those in capex allowance plans. Updating estimates OFGEM''s draft determination, which for SSE is relevant for its wholly owned electricity transmission business (SHET) as well as its 33% equity stake in SGN (gas distribution), was broadly in line with our assumptions. We therefore have only made small tweaks to our estimates, including a slightly higher than forecasted ''transfer'' adjustment to the opening SHET RAV in the new regulatory period. We have also made tweaks to our offshore wind modelling and to our below-the-line PandL assumptions following the release of the annual report. Reiterate Outperform Although we won''t have the company''s view on the full financial implications of the regulatory review until after the Final Determination in December, from our point view we do consider this as the lifting of the final overhang on the equity story. We expect SSE to progress with its strategy as presented at its 2019/20 results. We adjust our target price lower to account for the upcoming ex-dividend day (July...
Good set of FY19/20 results (to 31 March). On the back of the restoration of the capacity market payments in the UK and a strong performance in the renewables activities, offsetting the slight decrease in network activities, earnings per share increased by more than a third.
Headline numbers in line SSE has reported adjusted operating profit of £1,488m vs. our £1.479m, and adjusted EPS of 83.6p (vs. our 82p). Covid-19 has impacted by £51.9m, of which £33.7m has been treated as exceptional. Networks at £777m was slightly ahead of our £762m estimates, with renewable at £567m broadly in line with our £571m. Retained retail activities came up short. Adjusted net debt and hybrid capital of £10.5bn was in line with guidance. As expected, the FY dividend is 80p/share. Covid-19 to hit FY21 SSE has pointed to a potential £150-250m impact on EBIT from Covid-19 in FY21, and EPS guidance will be provided later in the year. Volume impacts in networks should be largely recoverable, but over half of the impact is seen in the customer solutions and enterprise activities. Measures to reduce FY21 cash outflow by £250m, largely by deferring capex, have been outlined. RPI dividend growth, supported by £2bn disposal programme A disposal programme of £2bn by autumn 2021 has also been announced. Non-core assets are targeted, and processes are under way for the gas production assets, and the contracting business. SSE has an option to sell the remaining SGN stake, is considering minority sales of electricity networks, and partnering in renewables. SSE sees this as supportive of its RPI dividend growth plan through to FY23, this being above the flat 80p dividend we assume. Capex driven by net zero Capex of £7.5bn through to FY25 is expected, above the £4.7bn we model, but a large part of the difference will be due to three large wind projects; Viking, Dogger Bank, and Seagreen, none of which are in our estimates at present. SSE also appears to have higher network spend, but this will be driven by Ofgem’s RIIO-2 decision, with draft determinations due on 9th July.
In its most recent trading statement, SSE guided towards a high single-digit percentage decrease for networks EBIT, and an increase of c25% for SSE Renewables. Our estimates are consistent with this guidance. SSE guided towards the lower end of an 83-88p range for adjusted EPS, pre any Covid-19 impacts that might become apparent. We have already factored additional bad debt costs into FY20E, and our adjusted EPS stands at 82p. Our net debt & hybrid capital estimate is £10.6bn, slightly above SSE’s guided ‘around £10.5bn’. We expect the full impact of Covid-19 to be felt in FY21E, with volume shortfalls (recovered two years later), heightened bad debt risk, and exposure to higher BSUOS costs as generation bears 50% of BSUOS costs. The SSE promoted CMP 345 MOD is pending Ofgem’s decision, but it appears that the baseline might prevail. FY21E is therefore exposed to heightened uncertainty and possible pressure on numbers. We also look for management to comment on exposure of fixed cost non-programmable generation to the low power price environment. SSE has indicated that future capex plans will be set out as part of the results, and a sell down of Seagreen was executed post year-end. We also look for an update on the gas production assets sale process. SSE confirmed its intention to pay an 80p dividend for FY20, with a RPI growth policy for FY21. Our view is that such a policy would lead to an uncomfortably high payout ratio, and we hold the dividend flat at 80p through FY23E. We look to the results for clarity on the policy.
Financial close reached on Seagreen… SSE Renewables has reached financial close on its 1,075MW Seagreen 1 offshore wind project, which is expected to generate 5,000GWh annually. 454MW of the capacity is covered by a CfD priced at £41.61/MWh (2012 prices) for delivery year 2024/25, and SSE has announced that an additional c30% will be contracted with the SSE Group. …51% to be sold to Total SSE Renewables has entered into an agreement to sell a 51% stake in its Seagreen 1 to Total for an initial consideration of £70m. The sale includes an equivalent stake in a potential extension opportunity at the site of up to 360MW. SSE Renewables will continue to lead on the development and construction of Seagreen 1 and will operate the asset on completion, which is expected in 2022/23. Cash inflow of £320m… Including the OFTO (c£500m), the project will require a total spend of c£3bn, and will be project financed with gearing of c42%. In addition to sale proceeds, historical capital investment of around £250m in the project will be repaid in full to SSE at financial close from the project financing. SSE's future equity investment is expected to total around £850m over the years 2020 to 2022, with the equity contribution for the 2020/21 financial year expected to be less than £50m. Updated capex plans will be set out in the FY results on 17th June. Seagreen will be equity accounted and as a result will not be consolidated on SSE's balance sheet. …supports the 50p we include in our target price for the sell-downs in Seagreen and Dogger Bank A sell-down to below 50% is consistent with SSE’s strategy, and was expected at/before the FID. We welcome the de-risking and increased visibility, and the £320m of cash inflow is broadly consistent with the c50p price we include in our target price for the sell-downs of 50% in Seagreen, and 10% of Dogger Bank.
EPS guided to lower end of range, where we sit SSE has published a trading update this morning, indicating that pre any Covid-19 impacts that may become apparent, EPS for FY March’20 will be at the lower end of the previously communicated 83-88p range. We are at 83.6p. A high single-digit decrease in operating profit for networks is indicated, suggesting that our 6% decrease may be marginally optimistic. On the other hand, we have a 21% increase in renewable operating profit vs. SSE’s indications of a c.25% jump. Net debt guidance is for c.£10.7bn, above our £10.3bn, and higher than the previously guided to level of £10.4bn. Capex of £1.5bn, £0.2bn higher than our estimate accounts for a large part of the difference. Adjusted net finance costs (including leases) are expected to be around £465m vs. the previously guided level of just over £450m, although the latter did not include IFRS 16 lease costs. SSE has £1.5bn of committed bank facilities comprising a £200m bilateral facility with Bank of China maturing in October 2024; and the £1.3bn Revolving Credit Facility, for which SSE recently exercised an option to extend for one year, taking the maturity to March 2025. Of these facilities, £75m is currently drawn. SSE has indicated that “to cover debt maturities later in the year, it will continue to monitor closely capital markets, and will look to issue new debt when appropriate”. FY results have been delayed until the second half of June. Dividend uncertainty SSE still intends to a pay an 80p dividend for 2019/20, as Covid-19 has not so far had a material impact on the current financial year, but the Board may reconsider the timing of dividend payments. For 2020/21, the target remains a full-year dividend of 80 pence per share plus RPI inflation. SSE has indicated that it is much too early to forecast the impact of Covid-19 on the UK and Irish economies and therefore on SSE's businesses. As such, SSE has indicated there is a possibility that the dividend policy could be revised: “The Board's final decision on the quantum and timing of dividend payments in relation to 2020/21 will be taken in light of the extent of the impact of the wider economic situation on SSE's businesses”. SSE will also be reviewing capital expenditure plans for projects which have not yet reached financial close. In our opinion, this would include both the Seagreen and Dogger Bank offshore wind projects, awarded last year in CFD AR3.
EPS guidance reiterated, but weakness in renewable output No change to FY19/20 EPS guidance of 83-88p (gas production classed as held for sale), and dividend commitment of 80p/share reiterated. Renewable energy output was just over 5% below plan as of 31st December. However, we are at the bottom end of the guided EPS range, although we note that consensus (87.7p) is at the upper end, and suggest that risk of any downward revisions lies there. Progress being made on offshore, no mention of Seagreen sell-down Good progress is being made on SSE Renewables' offshore wind projects with the first 'ground-breaking' at Dogger Bank on 17th January 2020 and several Tier 1 preferred supplier agreements signed in relation to both Dogger Bank and Seagreen. No indication of progress towards the Seagreen equity stake sale. Gas production sale process underway, but not expected in FY19/20 Work is continuing on the sale of gas production assets although a transaction will not be completed in FY19/20. We were not expecting a sale in the current financial year. There is no update on net debt.
Disposal of SSE Energy Services to Ovo cleared by CMA The CMA has cleared SSE’s proposed sale of SSE Energy Services to Ovo, and the full text of the decision is expected in due course. Given the previously cleared, but aborted, SSE Energy Services/npower tie-up, we fully expected this transaction to gain approval, and have already factored it into our estimates. Completion is expected in mid-January.
Forecasts updated post 1H20 results, taking into consideration comments made by SSE in the press release/presentation. Notable changes include gas production hedging as a continuing operation, an extension of onshore wind’s economic life for depreciation to 25 years from 20 years, higher expected losses in EPM in FY20E, and an effective tax rate of 12% vs. our previous assumption of 10%. This has the combined impact of pushing up EPS estimates across our forecast period, most notably in FY20E where our revised EPS of 83.6p, up 4.4%, is towards the bottom of SSE’s revised 83p-88p range. Many moving parts in our sum-of-the-parts valuation, but the most notable driver of a lower equity value, reduced by 46p/share, is SSE’s updated guidance of £10.4bn adjusted net debt at FY20, vs. prior guidance of £10bn, equivalent to a 38p/share impact. Our target price has, however, nudged up slightly to 1,350p (from 1,340p), as although granular detail on how the recently secured offshore wind CfDs will add value remains absent, SSE’s observations on the level of equity investment needed hint at value enhancing sell-downs. We acknowledge the risks attached to assuming value at this stage, ahead of further information in the first half of next year, but we have included c.50p of value enhancement from assumed sell-downs in arriving at our target price. SSE’s stock price is little changed from our recent more comprehensive report (see SSE: Increasing strategic clarity, but pause for breath, dated 24th October), and with a 12-month forecast total return of c.8%, we remain Holders.
SSE realised a good set of H1 19 results, driven by new renewables capacity and favourable weather conditions. However, the transmission and distribution activites decreased sharply, but were partially compensated by the good results in gas distribution. The group increased by 3.6% the mid-point of the FY20e EPS guidance.
In line, once adjusted for Capacity Market, depreciation policy change and gas production hedging At first glance, SSE’s adjusted operating profit of £492m is a substantial beat vs. our £343m estimate, but the former includes £110m of Capacity Market (CM) payments, £32m relating to gas production hedging contracts not classified as held for sale, and £15m from a change in depreciation policy for renewables. Adjusting for these, 1H20 appears to be broadly in line. At an individual business line, networks and thermal (adjusted for £80m of CM payments) were in line with our expectations, gas storage and business energy came up short, but renewables was a beat, even after adjusting for £18m of CM payments and the aforementioned depreciation change. Net debt guidance disappoints Adjusted net debt of £10.3bn was above our £9.8bn estimate, and FY guidance for this metric has moved out to £10.4bn vs. £10bn previously. SSE’s guidance includes proceeds from the sale of SSE Energy Services to Ovo (as do our estimates), and an assumption of some proceeds from a sale of a stake in Seagreen (our estimates don’t), and has seemingly been impacted by £0.3bn of revaluation adjustments. Versus our FY20E of £9.65bn, the guidance strikes us as a disappointment. EPS guidance raised by 3p/share due to inclusion of gas production hedging FY EPS guidance has been nudged up to 83p-88p as a consequence of gas production hedging contracts being retained and not accounted as held for sale, something that is estimated to add 3p to earnings. This is not inconsistent with our 80.1p estimate which does not include an amount relating to gas hedging. An interim DPS of 24p was in line with our expectations.
Over the past three years, SSE’s 1H adjusted operating profit has been in a 30-40% range of FY adjusted operating profit. 1H20 is set to be different, with SSE guiding to around 20% of FY adjusted operating profit. Our £343m 1H20E is equivalent to 23% of our FY20E. There are two key drivers to the timing of profit generation in FY20: (i) an expectation that over 90% of the expected £115m +/-£15m EPM loss will be incurred in 1H20; and (ii) reinstatement of the Capacity Market being a 2H event, with payments expected to be received in this period. This impacts both thermal and renewable generation, with the former likely to be loss making in 1H20. We look for SSE to provide detail on how the record low strike prices on the Dogger Bank and Seagreen offshore wind farms allow SSE to generate value, an update on the gas production disposal process, the RIIO-2 business planning process, and the revised proposals requested by Ofgem for the Shetland and Orkney island links. For FY20E, our adjusted EPS is 80.1p, positioning us at the bottom of SSE’s guided range, of 85p-90p with up to 5p of dilution if gas production is treated as ‘held for sale’, an accounting treatment we assume. A presentation will be held, and can be accessed via www.sse.com, or +44 20 7192 8000, with access code 1197523.
The announced disposal of SSE Energy Services to Ovo, albeit at a price lower than our valuation, facilitates greater strategic clarity and reinforces focus on the long-term direction of travel. A disposal of gas production, possible this year, would be a further boost. SSE’s success in the recent CFD Allocation Round 3 auction suggests that it is full steam ahead for the renewables strategy. Record low strike prices mean that the onus is on SSE to demonstrate how Dogger Bank and Seagreen will add value, but we believe low double-digit equity returns are possible in highly levered project finance structures. We expect SSE to sell down stakes in both projects, possibly with valuation benefits. Our housekeeping exercise on estimates sees EPS trimmed to reflect FY20E guidance update, and assumed reclassification of gas production as being ‘held for sale’. We make no change to our 80p dividend for FY20E, nor an RPI growth track through to FY23E. Our valuation moves up to 1,341p from 1,251p due to both positives (FY21E roll forward, higher gas production valuation, higher generation valuation) and negatives (achieved price for retail, JV debt and decommissioning liabilities), with an additional driver of our higher 1,340p target price the removal of the previously applied 133p nationalisation discount. However, a 12-month total return of c.8% suggests that increased visibility is largely in the price, and we remain Holders.
Cut to distribution profit expectations, but the wind is blowing again SSE has issued a 1H trading statement this morning, ahead of its close period. The overall outlook for FY adjusted operating profit across a number of businesses remains unchanged, although lower-than-expected Distribution Use of System electricity volumes and a greater number of network faults mean that SSEN Electricity Distribution's adjusted operating profit is now expected to be around £25m lower than first forecast, at around £375m vs. our estimate of £410m. However, recent favourable weather conditions mean that output of renewable energy as at mid-September 2019 is in line with the forecast annual total for the year, compared with the shortfall of around 4% as at June 2019. We expect pressure on consensus earnings SSE currently expects its adjusted earnings per share for 2019/20 to be around 85p-90p. SSE collates consensus, and has indicated this is within the range of analysts' forecasts, albeit that the midpoint is below our 89.6p and Factset consensus of 89.3p. The guidance assumes receipt of the suspended Capacity Market (CM) payments totalling £148m and normal weather conditions in the last seven months of the financial year. 1H expectations increase 2H challenge As far as 1H is concerned, the usual split is c.35% of annual adjusted operating profit being earned in 1H. SSE is guiding to around 20% of FY expectations being earned in 1H20 due to over 90% of the expected £115m +/-£15m Energy Portfolio Management (EPM) loss being incurred in the first half of the financial year, and the continuing suspension of the CM means SSE is unable to recognise the outstanding CM payments that SSE expects to receive in H2. Progress in gas disposal positive, but will hit adjusted EPS SSE has indicated it is making good progress with the planned disposal of its interests in gas production, and that its Gas Production segment is likely to be deemed to be held for sale in SSE's financial statements, an accounting change that would have the effect of reducing forecast adjusted earnings per share for 2019/20 by up to 5p. On balance, we view today’s statement as a slight negative Although the 80p FY dividend has been reiterated, we view the statement as a minor disappointment, both in respect of likely pressure on consensus, and the ask of delivering 80% of FY adjusted operating profit in 2H.
Record low price have been achieved in the CfD allocation round 3 auction, with clearing prices of £39.65/MWh for delivery year 2023/24 & £41.611/MWh for delivery year 2024/25, both in 2011/12 prices. 5.5GW of offshore wind, 0.3GW of remote island wind & a small amount of advanced conversion technologies was successful. We had previously indicated that prices below the strike prices (£56/MWh & £53/MWh respectively for the two delivery years) for offshore wind were a possibility, but the clearing prices are significantly below the previous UK record low of £57.50/MWh (2022/23 delivery year) and are likely to surprise. SSE’s Doggerbank & Seagreen offshore projects were successful, but it was not awarded remote island wind, which could have implications for the Orkney transmission link. We now look for SSE to justify the economics of these prices.
BEIS will publish the CfD allocation round 3 results by 8am on Friday after the Delivery Body has informed successful applicants of the final strike price, target commissioning date(s) and allocated capacity. In CfD allocation round 2, offshore wind cleared at £74.75/MWh for delivery year 21/22, and £57.50/MWh for delivery year 22/23, in 2012 prices. Allocation round 3 includes remote island wind with an administrative strike price (cap) of £82/MWh in 2012 prices for both 23/24 and 24/25 delivery years, and offshore wind with strike prices of £56/MWh and £53/MWh in 2012 prices for 23/24 and 24/25 respectively. The auction is ‘pay as clear’, but with individual technology prices capped at their respective strike prices. The auction has a cap of 6GW and a budget of £65m in 2012 prices. We have previously flagged c.9GW of offshore and remote island wind as having planning permission, and expect the process to be competitive. The amount of offshore wind being bid in, and the delivery years, will be key, and if offshore wind capacity entering the auction exceeds 6GW, a clearing price below the offshore wind strike prices is possible. Pricing of both offshore and onshore wind globally has been trending down as turbine size has increased, although load factors and responsibility for transmission costs limit the ease of regional comparison. SSE has previously indicated that it has 3.1GW that could compete in the auction (2.85GW offshore, 229MW remote island wind), with build out of renewables key to its post SSE Energy Services strategy.
Retail sold for £500m, completion expected late 2019/early 2020 SSE has entered into an agreement to sell its SSE Energy Services business to Ovo Energy for an enterprise value of £500m (£400m cash, £100m loan note) in a transaction expected to complete in late 2019/early 2020, subject to the necessary approvals. Ovo will be #2 in the UK market for both electricity (c.18% market share vs. British Gas c.19% market share) and gas (c.15% market share vs. British Gas c28% market share), and given that the terminated SSE/npower transaction received CMA clearance, we would not expect anti-trust issues.. Valuation 43p/share short of our £958m The possible transaction was flagged in The Sunday Times on 11 August which suggested an initial payment of £250m, with additional deferred consideration. Measured against this, the transaction value is arguably a positive, albeit a negative of 43p/share on our SOTP given our £958m valuation. EPS impact needs clarification SSE’s retail business is included in SSE’s accounts as a discontinued item, and excluded from SSE’s definition of underlying earnings. The impact on earnings will depend on the amount of debt sitting at the retail business, the magnitude of the service provision under the Transitional Services Agreement, and the accounting treatment of the 13.25% interest payable in kind on the loan note. We await clarification from SSE on these issues. SSE has reiterated its intention to recommend a full-year dividend of 80p/share, with RPI growth through to March 2023. Strategic clarity welcomed, but challenges remain The disposal of the retail business to Ovo accelerates what would have been a longer process, and one without guarantee of success, had a listing been sought. It provides greater strategic clarity, and allows SSE to fully focus on networks and renewables, and is a positive. However, we caveat this with a valuation that is below our expectations, and the challenges posed by a tougher regulatory backdrop, political noise around nationalisation, and competitive CFD auctions for renewables. We do not expect the disposal to trigger a re-rating of the stock.
Renewable output shortfall, but no change to guidance after 1Q SSE has acknowledged challenges in 1Q20, but is of the opinion that the key months of the financial year lie ahead. Guidance has been maintained, and SSE has reiterated its commitment to pay an 80p dividend for FY20, and the dividend plan set out in May 2018. As we suggested in our preview last week, renewable output was lower than expected for a typical year, with a shortfall of 400GWh in 1Q20, c.4% of annual forecast output. Our estimates suggest that this is a revenue impact of c.£40m. It appears that SSE is of the opinion that it is too early in the year to revise the ‘around £525m’ EBIT guidance for the renewables business (our estimate £528m), but this is something to watched at the next trading update, scheduled for 26 September. Ofwat cost of equity update supports Ofgem’s direction of travel As expected, SSE highlighted the growth aspects of its RIIO T2 draft business plan, although no reference was made to SSE’s view that the cost of equity is 6.9% CPIH real, an estimate considerably above Ofgem’s working assumption of 4.8% CPIH real. Ofwat’s update this morning suggests a cost of equity of 4.21% for wholesale water/wastewater activities, something we suggest is supportive of Ofgem’s direction of travel on cost of equity. We maintain our view that SSE’s final business plan will need to see change in this respect. 70k account loss in retail; tough operating environment SSE’s retail business has lost a further 70k accounts in 1Q20, 1.2% of the total at March 2019. It is clear that retail continues to be a tough market. There was no update on progress to deliver a future for SSE Energy Services outside the SSE Group. Three projects eligible for CFD Allocation Round 3 SSE has three projects eligible for the CFD allocation round 3. These are Viking (onshore), Seagreen (offshore) and Dogger Bank (offshore), with total capacity of 3.1GW. SSE indicated that the auction is expected to take place in the coming weeks, but has provided no additional information.
SSE is scheduled to issue a trading statement on 18th July, ahead of its AGM Wholesale – Hedging protects against recent wholesale price pressure, but wind output could disappoint 100% of its GB wind and hydro expected output is hedged for FY20, insulating SSE from recent power price pressure. However, UK wind conditions are likely to disappoint in Apr-June 19, while run-of-river output could again be below plan. Consequently, there could be an indication of a risk to FY20 guidance of £525m adjusted operating profit for the renewables business. SSE has announced that it intends to close Fiddler’s Ferry by March 2020 and exit coal. The Capacity Market remains suspended (SSE guidance includes £148m for FY20 incl. the FY19 shortfall), although BEIS has announced that it will hold T-1 (delivery 2020/21) & T-4 (delivery 2023/24) auctions, and that it is minded to hold a T-3 auction for 2022/23. CFD Allocation Round 3 is underway, and applicants were notified of the outcome of Qualification Assessment by 9 July. We look for SSE to provide visibility on which projects of the previously indicated 3.1GW (on & offshore) are competing for contracts. As of 31/3, SSE had hedged 95% of FY20 expected gas production at 46p/therm, which should protect against material negative impact from lower gas prices in this financial year. Networks – Draft business plan published Since FY19, Ofgem has published its RIIO-2 Sector Specific Methodology Decision with a working assumption of a CPHI real cost of equity of 4.8% (allowed return of 4.3%). SSE has published its draft business plan for RIIO-T2, with Certain View totex of £2.2bn (11% ahead of our estimates) & a promotion of a cost of equity of 6.9% CPIH real. We expect that SSE will highlight the plan, its key parameters, and the longer-term growth it could deliver. Retail – Expectation of further customer loss A discontinued business, but we look for an update on progress to deliver a future for SSE Energy Services outside the SSE group. The new ownership structure is not expected before the second half of 2020, but we look for an update on customer numbers which we expect to decline given high switching levels in April/May, against a backdrop of a tough market. Reiteration of intention to pay 80p dividend We expect a reiteration of the intention to recommend an 80p dividend for FY20, capex of c£1.5bn, and a year-end net debt target of £10bn.
SSE released a weak set of FY results, lower than our estimates. Network segment was the only one to grow, but not enough to compensate for the decrease in Wholesale and Retail. The group reiterated its five-year dividend plan.
SSE reported a weak set of H1 results, in line with the September profit warning. Adjusted operating profit was down 24%, to €448m on the back of lower renewables output and losses in the group’s EMP activities, due in part to a losing short position on gas prices. The group reiterated its five-year dividend plan.
SEE released a disappointing set of Q1 results, hampered by poor wind conditions in early June, higher gas prices and warmer weather. The 97.5p dividend has been confirmed. The demerger of SSE Energy Services is still expected to be completed by year end.
SSE released a fairly mixed set of FY results although broadly in line with market expectations. The group adjusted operating profit fell 2.4%, due to lower operating profit from the Networks (-18.5%) and Retail (-4.6%) activities, only partly offset by a robust Wholesale performance (+26.8%), driven by the increase contribution from renewables and higher thermal output. More importantly, the group provided 5-year dividend guidance.
• Positive EPS upward revision on EPS for 2017/18 (between 116p and 120p); • Dividend growth linked to RPI inflation for 2017/18 and 2018/19 maintained; • Retail separation (merger with Innogy’s N-power) currently underway.
Despite revenue growth of 8.2% to £12,184m, the group presented a weak start of the year with reported profits falling 30.9% to £549.4m. In line with lower operating profit, the group has reported EPS down 43.9% to 29.2p. On an adjusted basis, the group’s results are less dramatic than on a reported basis, but operating profit still dropped by 8% to £586.2m and EPS was down by 8.8% to 31.2p. Operating cash flows fell by 34.5% and capex was maintained at the previous year’s level at £779.5m, with £1.7bn expected for FY17/18. Net debt increased by 9% ytd to £9.2bn. Despite declining EPS, the group still proposed an interim dividend which was up 3.6% to 28.4p. The group expects an adjusted EPS at 116p for FY17/18, which translates into a -4.9% change and is below our expectations.
The group has published good full-year 2016/17 results with reported operating profit increasing by 234% to £1,940m and reported net profit increasing by a similar amount (+247%) to £1,599m. The difference is due to impairments incurred in 2015/16 on generation, gas storage and production assets; However, on an adjusted basis, operating profit increased by 2.7% and EPS increased by 5.2%, which are in the higher range of the market’s expectations, helped by a lower effective tax rate (10.2% vs 12.8%). The group saw a substantial improvement in its wholesale business (power generation & gas production) with earnings increasing +16.3%, a “normal” performance in networks +1.1% in profits, and a negative one in retail (-7.3%), confirming our view that there is increasing pressure in the UK retail business. The group has proposed a divided of 91.3p, which represents a 2.1% increase. For 2017, the group expects dividend growth in line with RPI inflation, below its dividend cover of 1.2-1.4x, although it is expected to be towards the lower end. This implies that EPS is likely to be below 2016/17’s level, as operating profit in the network business is expected to be £100m below last year’s.
SSE has published its half-year results which show revenues falling 18.6% yoy to £11.26bn. However, a substantial reduction in the COGS (-23.5% yoy) has boosted both the gross and operating profit to reach £636.7m (+141% yoy). Along the same lines, the net profit for the company reached £476.2m, which is a +147% yoy increase, translating into an EPS of 47.2p. However, on an adjusted basis, it is a completely different story. Adjusted operating profit decreased by 9.2% to £637.2m, with an adjusted operating profit before tax falling 13.3% due to a +5.4% rise in financial expenses. Along the same lines and added to higher hybrid coupon payments, the adjusted net profit of the group reached £344.8m, which is a 24.4% fall, with EPS reaching 34.2p, down 25.5%. The group proposed an interim dividend payment of 27.4p, which is a 1.9% yoy increase, while still maintaining its EPS FY2016/17 target of 120p.
SSE has just signed an agreement for the disposal of a 16.7% stake in Scotia Gas Networks Limited (SGN) to a fully-owned subsidiary of the Abu Dhabi Investment Authority (ADIA) for an all-cash consideration of £621m (including debt). The transaction is expected to be completed by the end of the month. SSE will retain a 33.3% stake in SGN. SSE will set out its intentions with regard to returning value to shareholders when the half-year results are released.
SSE published its trading update where electricity production fell in the first quarter by 31.4% to 1.51TWh, however, output from gas production rose 37.4% to 158 million therms as a result of the Greater Laggan Area assets coming online. Moreover, customer losses continue but have slowed down with a decrease in its customer base of 0.6% in the first quarter to 8.16 million. On the other hand, home service customer accounts partially compensated the 50k customer losses in the retail business as they increased by 16k to 416k. The capex target has been maintained at £1.75bn for 2016/17, in addition to an expected envelope of £5.5-6bn up to March 2020. The group confirms that it expects to return to growth with adjusted EPS to be at least 120p and a dividend increase of at least RPI inflation for 2016-17 and thereafter. The disposal of a stake in the gas distribution system has started with the group targeting to sell up to a 30% stake of its 50% equity stake in SGN. If completed, SSE should use the proceeds either as a return to shareholders or to boost additional investment. In addition to this, an agreement has been found to dispose of the three remaining PFI street lighting entities.
Positive FY15-16 results for the company despite the challenging conditions as the adjusted operating profit decreased by 3% yoy to £1,824m, but this was ahead of estimates. Following the same path, adjusted profit before tax fell 3.2% yoy to £1,513m, which is 2% better than expected. Reported net profit decreased by 15.2% yoy to £460m, affected by £889.8m of impartment charges linked to the wholesale market, although on an adjusted basis net income fell 1.8% to £1,195m but beating forecasts, translating into an EPS of 119.5p which exceeded the company’s guidance of 115p, as there was less dilution. Based on this, the company proposed a dividend payment of 89.4p, a 1.1% yoy increase with a dividend cover of 1.34x; however, the proposed payment is below expectations. Moreover, net debt increased 11% yoy to £8,395m. Also, SSE is considering the divestment of up to one third of its 50% equity stake in the gas distribution business (Scotia Gas Network: SGN) in addition to the current £1bn disposal programme currently in place. The guidance for 2016/17 is for an increase in operating profit, supported by networks and wholesale as retail should have a flat performance. Furthermore, the company expects to obtain at least an EPS of 120p with dividend payment growth linked to inflation and capex of around £1.75bn.
The group has published a trading statement with rather weak operational results: electricity output decreased by 12% yoy on gas-fired power and 27% yoy on the coal assets. Gas production decreased by 2% yoy. The group lost 3.5% of its customers in electricity and gas to 8.28m, but increased by 14% its customer service accounts (390k). Household electricity consumption decreased by 3% and gas consumption remained flat. The number of customer interruptions decreased by 7%, which is a positive for networks. Despite this, SSE confirmed adjusted EPS at 115p and the dividend payment for 2015/16 with an increase at least linked to inflation and a similar policy for next year's dividend payment (growth at least in line with inflation). The group has announced that it will cut household gas prices by 5.3% starting from March 2016.
Mixed set of results for the group for the half year mark with revenues increasing by 11.5% to £13.83bn, although increasing costs (+13% ytd) have decreased the operating profit of the group by 24.4% to £263m, pushing downwards the net income of the group to a 23.5% fall to £192m, despite lower interest expenses. Hence, EPS reached 19.4p per share, which is 27.8% below the interim dividend proposed, which itself has been increased by 1.1% to 26.9p per share. The net debt of the group has increased more than expected to £4.98bn (an 8.7% ytd increase) without hybrid bonds, although adjusted with hybrids it rises up to £7.96bn. The increase is driven by an increase in capital investment to £757m, mostly attributed to networks (53%), increasing the regulated asset value. Concerning guidance, it has been stated that last year the group earned a quarter of its full-year operating profits in the first half, while this would correspond to 1/3rd for the current 2015-16 year, which is in line with our expectations.
The group’s management interim statement did not provide major surprises: SSE confirms its FY 15/16 objectives: EPS of at least 115p, a dividend increase at least in line with RPI inflation, and capex at £1.75bn. Operating wise, it expects an increase in operating profits on its energy portfolio management and generation businesses, with a decline in the operating profit of energy supply.
