SSE has agreed to acquire a 3.9GW portfolio of European wind development projects, from Siemens Gamesa Renewable Energy (SGRE). The agreement comes with scope to develop an additional 1GW of solar opportunities.
The deal is valued at €580m and is expected to complete in September 2022, subject to regulatory approval.
SSE Renewables managing director Stephen Wheeler said: "Mainland Europe is an exciting growth market for onshore wind, with clear carbon reduction targets and supportive policies, and the expert management team will complement our sector-leading capabilities perfectly. The project portfolio brings some excellent assets and will provide a real springboard for our expansion plans in Europe across wind, solar, batteries and hydrogen."
At the end of March, the group also increased its Earnings Per Share expectations, to 92 - 97p, from 90p. That reflects a better-than-expected output from renewables.
SSE shares were broadly flat following the announcement.
View the latest SSE share price and how to deal
Our view
SSE's accelerating its pivot towards renewable energy as governments around the world aim to increase energy independence with cleaner alternatives. The group's expansion into Southern Europe later this year is proof of management's conviction. But having more wind in the sails doesn't guarantee smoother seas. Performance in SSE's renewables division has left something to be desired so far this year. Despite improvements, output is still 12%, below targets. So while SSE may see itself as a renewables powerhouse in the future, it's still reliant on it's core business at present.
Networks is SSE's core business, delivering electricity across Scotland and Southern England. It also 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 currently offer a prospective yield of 4.8%. Remember yields are not a reliable indicator of future income and dividends could be cut further at a later date. They are variable and not guaranteed.
Regulated profits tend to be relatively predictable because prices are set in-line with wholesale costs. The group will be benefitting from regulators' decision to increase the energy price cap as the crisis in Ukraine sends the cost of power higher. But the trade-off for this stability is minimal growth.
But the push for renewables puts utilities in a unique position to revamp their business and potentially enjoy steeper growth ahead.
Renewables made up about 49% of underlying operating profits last year, but the plan is a fivefold increase in capacity to 50TW per year by 2031. This requires a substantial £12.5bn investment over the next 5 years.
It comes with a hefty dose of risk, which doesn't often accompany a utility investment. SSE's pouring money in to a yet unproven part of the business. The group needs to strike a delicate balance between positioning itself for future growth and keeping the cash coffers from running dry.
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, keeping net debt to adjusted cash profits (EBITDA) in line has relied on asset sales. £1.3bn just hit the books following the Scotia Gas Networks sale, which more than offsets the cost of the wind acquisition, but at some point there'll be no more fat to trim.
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, but has been capped at 25%.
There are external threats as well. Regulatory challenges loom, particularly as ballooning energy prices compound the cost of living squeeze that most are enduring at present.
The combination of reliable networks and growing renewable energy businesses sounds attractive, but it's costly and adds a layer of risk until SSE starts generating cash more reliably. If SSE gets this transition right investors could enjoy a more sustainable dividend with the potential to grow over time, but it's still unclear whether the renewables business can generate the necessary returns and there are no guarantees.
SSE key facts
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.
Full Year Results (8 February 2022)
Full year earnings per share are expected to be at least 90p, up from previous guidance for 83p, as performance from the flexible thermal and hydro plant offset lower-than-planned renewables output.
The group intends to offer an 81p dividend for the full year, which will be adjusted upward for inflation. This will be reset to 60p in 2024/25 with 5% increases in the following two years.
In the 9 months to 31 December, Renewables output was 1.4TWh, 19% below plan due to a lack of wind and rain in the summer months. Distribution delivered 1TWh more than it did last year during the period and Thermal saw output decline 14%.
The group's on track to spend over £2bn on capital expenditure this year, and net debt is expected to come in around £9bn including the proceeds from the planned disposal of Scotia Gas Networks.
SSE's refreshed its 2030 business goals to reflect progress so far. The group revised its carbon intensity reduction target to 80% from 60% and revised down the number electric vehicles it could support on its networks from 10m to 2m.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.