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SSE - EPS expected at lower end of guidance

Emilie Stevens, Equity Analyst | 27 March 2020 | A A A
SSE - EPS expected at lower end of guidance

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SSE expects this year's underlying earnings per share to be at the lower end of the 83p to 88p guidance range. The group said "this is before any Covid-19-impacts that may become apparent and need to be reflected in the financial statements for the year".

The board continues to recommend a full year dividend of 80p per share this year, but if SSE sees adverse business impacts from COVID-19, the timing of payments may be reconsidered.

SSE's dividend policy remains unchanged but a decision on the size and timing of next year's dividend will be taken when there is a clearer picture of the impact from COVID-19.

The shares fell 5.4% following the announcement.

View the latest SSE share price and how to deal

Our view

With the sale of its retail business complete and the Gas Production business on the block, SSE now splits into two - a Networks business which delivers electricity to homes and a renewable energy giant.

Networks is SSE's core business - delivering electricity across Scotland and Southern England and owns high voltage transmission cables in the Scottish Highlands and Islands. This is classic utility territory - with revenues almost guaranteed and profits closely regulated. As a result, the group's been firmly in the income category. And until announcing a dividend cut ahead of the separation of the retail division, the payout had grown for over 25 years.

Regulated profits might be more predictable, but they're unlikely to grow quickly, which makes renewable energy SSE's growth engine. Increasing concern about climate change is ramping demand for cleaner energy and SSE's wind farms and hydropower could be a perfect solution. Renewables currently make up around 30% of profits but the plan is to treble renewable output by 2030 to 30 TWh a year (enough to power Scotland for a year).

So far so good, but there are challenges ahead.

Cash has been something SSE has found harder to come by in the past. It hasn't always generated enough to cover the multi-billion pound infrastructure bill and fund the dividend as well. The result has meant 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 disposals. But neither are long-term solutions.

There are some external threats too. Tougher price regimes loom as a new regulatory period is on the horizon. That has the potential to put pressure on margins. And while renewable energy is a growth sector, its returns are dependent on the unpredictable British weather. SSE says it's still too early to assess any impact of the coronavirus on the business but it's monitoring the impact on the wider economy.

Overall we think SSE's focus on networks and renewables makes sense, but there's more work to be done, particularly in turning around the cash position. The shares currently trade on 14 times expected future earnings, above a longer run average of 12. SSE offers a prospective dividend yield of 5.9%. And while the dividend policy remains intact, today's update suggests a future change is something investors should be alert to.

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Trading Update

In the regulated Networks business, full year underlying operating profits are expected to see a high single digit decrease - reflecting lower electricity demand than expected and greater network faults.

SSE's Renewables business is expected to see full year underlying operating profits increase by around 25% - largely driven by a full year of output from Beatrice offshore wind farm. Total renewable energy generation is expected to be close to 11.4TWh, up from 9.8TWh last year.

Capital and investment expenditure for the year will be £1.5bn, slightly higher than forecast.

Net debt is expected to be around £10.7bn. This year's position reflects development projects and movements in foreign exchange rates.

In terms of liquidity, SSE has access to £1.5bn committed bank facilities, of which only £75m is drawn. To cover debt maturities later in the year, SSE will look to issue new debt when appropriate.

The group will be reviewing operational and capital expenditure plans for projects which have not yet reached financial close.

SSE have said it's too early to forecast the impact of COVID-19 with accuracy. However, the firm is planning for a range of scenarios over the coming months and has put in place a number of practical steps in line with government guidance on tackling the spread of Covid-19.

As a result SSE now expects to publish full year results in the second half of June, with the exact date yet to be announced.

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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.

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