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SSE - full year EPS guidance upgraded to over 150p

The group upgraded its full-year underlying Earnings Per Share (EPS) guidance from at least 120p to more than 150p.

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SSE output of electricity from SSE-owned renewable sources across the UK & Ireland was 10% lower than planned at 0.76TWh for the nine months to 31 December 2022. This was impacted by unseasonably calm and dry weather and delays to the Seagren offshore wind project, which is still expected to completeon time in summer 2023.

Output of electricity from SSE's gas fired generation plant was 27% higher than the same period last year.

The group upgraded its full-year underlying Earnings Per Share (EPS) guidance from at least 120p to more than 150p. This was helped by the diversity of its revenue streams, and reflected increasing clarity over wholesale energy prices and state levies on Electricity Generators.

The intention to pay a full-year dividend of 85.7p per share plus RPI for 2022/23 has been reiterated. This is expected to drop to 60p in 2023/24 and increase by 5% per year for the next two years to help support the group's "significant" investment and growth plans. However, no dividends can be guaranteed.

The shares rose 2.8% following the announcement.

View the latest SSE share price and how to deal

Our view

SSE's latest trading update shows that it's staying the course with its pivot towards renewable energy. It's trimming its exposure to traditional utilities. After the recent sale of 25% of SSEN Transmission, the disposal of a slice of the electricity distribution business is next in line.

Turbo-charging efforts to renewables is a bold and admirable move. But the shift to renewables comes with a hefty dose of risk - they're not always reliable. To some degree, its at the mercy of mother nature. Unseasonably calm and dry weather this winter left the group's renewable output some 10% lower than planned. This means flexible gas-fired plants will still have to plug the energy shortfall for now. Fortunately these are also part of SSE's offering and can help to smooth its revenue profile.

That brings us to Networks, delivering electricity across Scotland and Southern England. 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.

However, in a bid to free up cash for growth and further renewables investment, the group now plans to rebase its dividend from more than 85p down to 60p, beginning in 2023/24. This is a stark reminder that dividends are variable and not guaranteed. 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 its enormous 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. Time will tell if SSE further reduces its ownership of its core businesses.

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. Weaning the UK off its gas dependency may help to mitigate this in the future.

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 "if" is doing a lot of the work.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 20th January 2023