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SSE - power running low

George Salmon | 8 February 2019 | A A A
SSE - power running low

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SSE has confirmed it's set to deliver adjusted earnings per share of around 64-69p for the year to 31 March 2019, against previous forecasts of 70-75p.

That's due to the GB Capacity Market scheme, an arrangement designed to encourage investment in renewable energy, being placed on hold by the European Commission.

The UK government has previously stated it still intends to make the payments, so SSE says the issue should be one 'of timing only'.

The shares fell 1.8% on the news.

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Our view

SSE is one of the UK's biggest energy companies. It generates energy, and supplies gas and electricity to close to 6m UK households. It also has a network of electricity transmission assets including 130,000km of lines and cables.

It's capable of delivering steady revenues and profits, but is also heavily regulated. That puts rapid growth out of reach. As a result, SSE sits firmly in the income category.

The group's decided to rebase the dividend next year ahead of the anticipated separation of the bulk of the retail division. But looking back the record is excellent. SSE has grew the payout for over 25 years. Unfortunately it hasn't always generated enough cash to cover the mulit-billion pound infrastructure bill and fund the dividend as well. As a result, debt has risen.

A moderate level of debt is no bad thing, especially for a utility, but SSE clearly can't keep borrowing forever. The scrip dividend, where dividends are paid in shares rather than cash, is helping to ease the burden, as are asset sales. But again, neither are long-term solutions. Perhaps it shouldn't come as a surprise that SSE's credit rating was recently downgraded by both Moody's and Standard & Poors, two leading rating agencies.

Unfortunately, the Networks business, while capable of delivering reliable revenues, is likely to see allowed margins drop as rules stiffen, while we've seen how the weather can impact returns from the group's wind and hyrdro assets.

There are external threats too. Nationalisation has re-entered the debate for the first time in a generation, and a trend towards higher interest rates could reduce the appeal of dividend paying stocks like SSE.

All told, there's plenty of uncertainty around.

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Third quarter trading details

SSE's renewable generation output in the nine months to 31 December rose from 6.5GTWh to 6.6TWh, but was around 10% lower than forecast due to relatively dry and still weather in the early months of the financial year. A repeat of those conditions in January 2019 meant renewable energy output was 25% lower than forecast last month too.

During the period, the group confirmed the sale of the Dunmaglass and Stronelairg onshore windfarms for £635m. That takes agreed asset sales to over £1bn so far this year.

However, with capital expenditure set to rise to £1.7bn from £1.5bn last year, and earnings due to fall, the group's net debt position is still expected to rise from £9.2bn to £9.8bn by year end.

The plans for the dividend remain unchanged. SSE continues to target paying 97.5p in 2018/19, before rebasing the payment to 80p next year. The plan is to grow the dividend in line with RPI from then on. Always remember though, there's no guarantee these plans will come to fruition.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.