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SSE - COVID costs hit underlying results

Nicholas Hyett, Equity Analyst | 18 November 2020 | A A A
SSE - COVID costs hit underlying results

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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: 1,514.50 | Buy: 1,515.00 | Change -2.00 (-0.13%)
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SSE's first half adjusted operating profit fell 15% to £418.3m, and management estimates the COVID-19 impact to have been £115m. Full year COVID-19 costs are expected to be in the middle of the previously announced £150m to £250m range.

The board declared an interim dividend of 24.4p.

The shares were broadly flat following the announcement.

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Our view

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

Networks is SSE's core business. It delivers 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 predictable and profits closely regulated. Historically utilities have been able to pay attractive dividends, and SSE has been no exception. Although the dividend was cut when the retail division was sold, the shares still offer a prospective yield of 6.1%.

Regulated profits might be relatively predictable, but they're unlikely to grow quickly, which makes renewable energy SSE's growth engine. Renewables made up about 38% of profits last year, but the plan is to treble output by 2030 to 30 TWh a year (enough to power Scotland).

So far so good, but there are challenges too.

Cash has been something SSE has found hard 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. As a result net debt to adjusted cash profits (EBITDA) is currently ahead of target.

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 ease the burden short term, and so are some asset sales.

There are external threats as well. Lockdown has reduced energy demand and increased bad debts - particularly from business customers. More important is a tougher regulatory regime on the horizon, which will likely see profits squeezed as the regulator puts pressure on prices while increasing performance expectations. The final proposals will be published in December this year.

The combination of a reliable networks business and growing renewable energy looks attractive on the surface. But we're not going to get excited until SSE starts generating cash reliably and stabilises the balance sheet. If SSE gets this transition right investors could enjoy a sustainable and growing dividend, but at the moment that's far from guaranteed.

SSE key facts

  • Current 12m forward P/E ratio: 17.1
  • 10 year average 12m forward P/E ratio: 12.4
  • Prospective yield: 6.1%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Half Results (adjusted figures)

Operating profit in the Electricity Networks division fell 14% to £224.8m. This reflects a 5% increase in Transmission operating profit to £115.2m thanks to the timing of payments, offset by a 27% fall in Distribution profit to £109.6m, which management attributed to lower electricity demand thanks to COVID-19. SSE's investment in Scotia Natural Gas generated operating profits of £89.4m, down 12% on last year.

SSE Renewables' operating profit fell 6% to £141.6m, mainly due to poor weather conditions. As a result power generation was 428GWh behind management's plan. Lower power generation was partially offset by higher electricity prices.

Thermal Energy generated operating profits of £31.7m, a 15% fall on last year. This reflects moderating losses in Gas Storage and a 14% drop in Thermal Generation profits.

The Customer Solutions division swung from a £19.3m profit to a £10.8m loss, reflecting a stable performance from SSE Airtricity and loss in Business Energy due to lower demand and ineffective hedges.

Losses narrowed from £81.2m to £1.5m in Energy Portfolio Management. The Enterprise division made a £33.5m loss, compared with an £8.2m profit last year.

Since March SSE's net debt and hybrid capital has increased from £10.5bn to £10.6bn. Net debt is expected to fall to £9.5bn by March 2021 as the group sells assets.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 for more information.