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SSE - investment continues as full-year profits jump

SSE's underlying operating profit rose 65% to £2.5bn, reflecting higher allowed revenues...

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SSE's underlying operating profit rose 65% to £2.5bn, reflecting higher allowed revenues, permitted by the regulator, across its Transmission and Distribution businesses. Thermal profit more than tripled to £1.2bn, while output from the Renewables division was lower-than-planned as it suffered from unfavourable weather conditions.

SSE appear to have paused the sale of 25% of its Distribution business, with the group stating that "retaining 100% ownership of SSE Distribution is the right strategy at this time."

This year's capital expenditure and investment is expected to be above the record £2.8bn seen last year. Underlying EPS is expected to be at least 150p, compared to the 166p seen last year.

A final dividend of 67.7p per share takes full-year dividends to 96.7p, representing growth of 12.8%. To fund investment in its net zero plans, this year's dividend will be rebased to 60p, with annual increases of 5-10% targeted for the next three years. Although dividends are not guaranteed.

The shares rose 2.3% following the announcement.

View the latest SSE share price and how to deal

Our view

SSE posted a strong set of full-year results, with the group's Thermal division helping to stoke profits higher.

Looking ahead, SSE's announced it's staying the course with its pivot towards renewable energy. 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, it's at the mercy of mother nature.

That reality hit home last year as unfavourable weather left the group's renewable output lower than planned. Fortunately, the Thermal division's flexible gas-fired plants helped to plug the energy shortfall. These assets are still part of SSE's offering and helped to majorly boost profits last year - allowing the group to surpass its recently upgraded earnings per share (EPS) guidance.

On the Networks side of things, SSE delivers electricity across Scotland and Southern England. This is classic utility territory - with revenues predictable and profits closely regulated. Because of this, utilities have historically 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 confirmed it will rebase its dividend down from 96.7p down to 60p, beginning this financial year. 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.

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. 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. Last year, SSE's financial performance was actually buoyed by these high energy prices, but it's unlikely that prices will remain at such high levels over the long term. That means 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 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 the transition.

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: 24th May 2023