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SSE - dividend rebased lower, full-year guidance intact

SSE's half-year revenue fell 14.9% to £4.8bn due to a large decline in its Energy Markets division...

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SSE's half-year revenue fell 14.9% to £4.8bn due to a large decline in its Energy Markets division. This division's responsible for bringing the group's energy output to market, and was negatively impacted by lower volatility and prices in the commodities that it trades.

Underlying operating profit fell at a slower rate of 3.2%, down to £693.2m. Higher prices in the group's thermal energy plants led to profits at SSE Thermal more than tripling, but this wasn't enough to fully offset declines in its Distribution and Gas Storage divisions.

Underlying net debt remained broadly flat over the first half at £8.9bn. Free cash flow improved from a £0.1bn outflow to a £1.2bn inflow due to improved cash generation from operations.

Full-year underlying earnings per share (EPS) guidance of more than 150p has been reiterated, building from the 37p reported in the first half. That means EPS is heavily skewed towards the second half, as is usually the case.

An interim dividend of 20p per share has been announced, down from 29p. This tallies with previous guidance that the full-year dividend is being rebased down from 96.7p to 60p, to help fund the group's investment plans.

The shares rose 2.5% following the announcement.

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Our view

SSE's transition towards becoming a renewable energy powerhouse is well underway. The five-year investment budget's been increased by £2.5bn to £20.5bn, with 90% of that set to be invested in electricity networks and renewables.

Turbo-charging efforts to renewables is a bold and admirable move. But the shift comes with a hefty dose of risk - they're not always reliable. To some degree, it's at the mercy of mother nature.

That's really hit home in the first half, as unfavourable weather conditions have left the group's renewable output 19% lower than planned. Fortunately, the Thermal division's flexible gas-fired plants helped to plug the energy shortfall.

On the regulated networks side of things, SSE delivers electricity across Scotland and Southern England. This is classic utility territory - with revenues predictable and profits closely regulated. A portion of these regulated revenues are positively related to investment levels, and are also protected against inflation. The only caveat here is that the additional return isn't received until sometime after the service and investment has been made, which can cause a drag on cash flows in the meantime.

So, in a bid to free up cash for growth and further investment, the group's rebased its dividend to 60p, down from 96.7p last year. This is a stark reminder that dividends are variable and not guaranteed.

These investment plans look achievable in our eyes but they're set to stretch the balance sheet, with the ratio of net debt to cash profits (EBITDA) likely to rise from 2.7x to between 3.5-4x in the medium term. While a moderate amount of debt isn't a bad thing, especially for a business with such reliable revenues, it does add pressure to keep delivering.

There are external threats as well. Regulatory challenges loom, particularly as high energy prices compound the cost-of-living squeeze. Many areas of SSE's business benefit from these high prices, as well as increased price volatility. But with market conditions seemingly less turbulent this year, other areas of the business will have to step up to pay the investment bill.

We don't think the ambitious growth plans are fully reflected in the current valuation, suggesting that investors still need some assurance that SSE can deliver on its promises. Long term, we're optimistic about the group's prospects, but in the near-to-medium term, volatility should be expected as SSE makes these transitions.

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.

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.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 15th November 2023