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SSE - steady underlying results

William Ryder, Equity Analyst | 26 May 2021 | A A A
SSE - steady underlying results

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SSE plc Ord 50p

Sell: 1,632.00 | Buy: 1,633.50 | Change 0.00 (0.00%)
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SSE has reported a 1% increase in full year underlying operating profit to £1.5bn. Coronavirus reduced operating profit by £170m, which is at the lower end of the guidance range. Underlying earnings per share rose 5% to 87.5p, within the expected 85-90p range.

The board is recommending a final dividend of 56.6p per share, bringing the full year payment to 81.0p. The dividend is up 1.2% on last year, in line with average Retail Price Inflation over the year.

SSE is not providing detailed guidance for the next year, but expects the Enterprise and Business Energy divisions to incur the bulk of ongoing coronavirus costs.

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 5.4%.

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 49% of underlying operating profits last year, but the expectation is to exceed the target of trebling 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) was ahead of the target range, but has recently been brought back into line through asset sales and revaluations.

A moderate level of debt is no bad thing, especially for a business with such reliable revenues, but it's still important to keep liabilities in check. The scrip dividend, where dividends are paid in shares rather than cash, is helping ease the burden short term.

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 following a draft in July.

The combination of a reliable networks business and growing renewable energy looks attractive, but we're not going to get too excited until SSE starts generating cash reliably. If SSE gets this transition right investors could enjoy a sustainable and growing dividend, but that's never guaranteed.

SSE key facts

  • 12m forward Price/Earnings ratio: 16.8
  • Ten year average 12m forward Price/Earnings ratio: 12.7
  • Prospective yield: 5.4%

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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Full Year Results

Underlying operating profit at the Networks division fell 15% to £488.2m. This reflects a 1% increase at SSEN Transmission to £220.9m, where increased phasing of allowed revenue and higher connection activity offset a rise in operating costs due to high levels of investment. Regulatory Asset Value (RAV) for the division rose 4.7% to £3.6bn, reflecting £435.2m of investment.

Operating profit at SSEN Distribution fell 25% to £267.3m, primarily reflecting lower volumes from non-households. Management expects to recover some of the shortfall under existing regulatory arrangements. RAV for the division rose 2.9% to £3.8bn after £350.8m of investment.

SSE's Investment in SGN delivered a 14% reduction in operating profit to £173.0m. This was driven by higher costs, lower activity because of the pandemic and lower income from land sales. RAV was broadly flat at £1.95bn.

Underlying operating profit at the Renewables division rose from £567.3m to £731.8m. This included £226m from the sale of 51% of the Seagreen offshore wind farm and 10% of the Dogger Bank farms. Excluding this contribution, operating profit fell due to a 10% decrease in output from disposals and adverse weather, partially offset by higher prices and plant availability. The group invested £294.3m in the division and total renewable generation capacity fell from 3,974MW to 3,882MW.

Thermal Generation reported a 5% increase in underlying operating profit to £160.5m. Higher utilisation and asset sales entirely offset the impact of a one-off restatement in the prior year. Capital spending fell from £177.0m to £106.5m. Gas Storage recorded a £5.7m loss, compared with a £3.7m profit last year.

The Customer Solutions division recorded £20.0m in underlying operating profit, down from £58.0m last year. This reflects a £24.0m loss from SSE Business Energy as the pandemic reduced commercial demand, and a £44.0m profit from SSE Airtricity.

Energy Portfolio Management generated £18.4m in underlying operating profit compared with a £60.3m loss last year, reflecting legacy losses on gas positions. SSE Enterprise recorded a £21.3m loss, compared with an £8.1m profit last year, reflecting lower Contracting and Rail activity due the pandemic. Unallocated Corporate losses were £58.4m.

Adjusted net debt and hybrid capital fell from £10.5bn last year to £8.9bn, reflecting ongoing asset sales and adjustments, partially offset by ongoing investment. Net debt is now 4.6 times cash profits (EBITDA), within the group's 4.5 to 5.0 target range.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.