Coronavirus - we're here to help
From how to access your account online, scam awareness, your wellbeing and our community we're here to help.

Skip to main content
  • Register
  • Help
  • Contact us
  • Log in to HL Account

SSE - agreement with OVO

George Salmon | 13 September 2019 | A A A
SSE - agreement with OVO

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

SSE plc Ord 50p

Sell: 1,382.50 | Buy: 1,383.50 | Change -14.00 (-1.00%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

SSE has announced it's reached an agreement to sell its retail-focused SSE Energy Services business to OVO, pending regulatory approval.

The deal is expected to complete in late 2019 or early 2020. SSE will receive £400m upfront and £100m in loan notes, and the bulk of the cash proceeds will be used to reduce net debt.

The shares moved 1.7% higher on the news.

View the latest share price and how to deal

Our view

We all recognise SSE's retail gas and electricity business, which supplies close to 6m UK households. However, that business is on the way out, and would already have left were it not for a move to combine it with npower falling through last year.

The rest of SSE is an amalgam of power generation (think wind farms, gas and hydro sites) and a network of electricity transmission assets including 130,000km of lines and cables.

The need to keep the lights on should mean SSE is capable of delivering steady revenues and profits. But with tight regulation on many of its activities, rapid growth is out of reach. As a result, the group sits firmly in the income category. Until announcing a dividend cut ahead of the separation of the retail division, the payout had grown for over 25 years.

However, that track record was already looking a bit shaky. SSE hadn't always generated enough cash to cover the multi-billion pound infrastructure bill and fund the dividend as well. Consequently, net debt has been trending up.

A moderate level of debt is no bad thing, especially for a business with such reliable revenues, but SSE 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 ratings are lower than they have been in the recent past.

The shares offer a prospective yield of 7%. Attractive, but if the dividend is going to be as sustainable as the energy SSE is producing, cash flow will need to improve. Especially when the Energy Services division is sold.

While the Networks business is capable of delivering reliable revenues, allowed margins are likely to drop as regulatory rules stiffen, and the weather can impact returns from the group's renewable assets.

There are external threats too. Nationalisation has re-entered the debate for the first time in a generation, and could see the shares taken under government control for an as yet uncertain price. There's also a trend towards higher interest rates, which could reduce the appeal of dividend paying stocks like SSE.

All told, it's difficult to be confident about SSE at the moment.

Register for updates on SSE

AGM trading update (three months to 30 June 2019)

Renewable output rose 14.9% to 1,794 GWh. However, that reflects the addition of new wind capacity, with unfavourable weather ensuring output was around 20% lower than in a typical June quarter. Gas and oil output fell 28.3% to 3,810GWh, while there was no coal-fired output.

The Transmission business published its draft plans for the next regulatory price control. SSE says £2.2bn of total expenditure is required over the five-year period to maintain and grow the north of Scotland transmission network. This could see the Regulatory Asset Value of SSE Transmission assets rise to over £5bn by 2026.

In SSE Distribution, average minutes lost and interruptions both improved, while the group launched a smart grid trial in Oxfordshire.

The Energy Services division is still expected to be separately listed or under new ownership by the back end of 2020. Total customer accounts fell by 70,000 in the quarter, to 5.71m.

SSE remains committed to its dividend plan for the five years to March 2023. This includes targeting a full-year dividend of 80 pence per share for 2019/20.

Find out more about SSE shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.