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SSE - weak first half but full-year guidance intact

SSE issued a trading update ahead of its half-year results next month.

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SSE issued a trading update ahead of its half-year results next month. It expects to report half-year underlying earnings per share (EPS) of at least 30p.

Renewables output was around 19% behind plan, with unfavourable weather conditions called out as the main cause. Gas-powered flexible thermal assets are helping to plug some of the energy shortfall.

The gas storage division, which typically benefits from price volatility, is expected to be loss-making in the first half due to the relatively stable market. However, this is expected to swing back to profitability over the full year as the gas is withdrawn.

Full-year underlying EPS guidance of at least 150p remains intact, with the majority of earnings weighted towards the second half reflecting the seasonal nature of SSE's operations.

The shares were broadly flat following the announcement.

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Our view

Power utility, SSE, had been hoping for a return to more normal weather in the second quarter, after a slow start to the year for its renewable energy assets. But that didn't materialise and other parts of the business are having to pick up the slack, leaving little room for further slippage if full-year guidance is to be hit.

Looking ahead, SSE's staying the course with its pivot towards renewable energy. 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. 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 last year 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 this year. 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 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: 4th October 2023