First-half Renewables output is expected to increase by about 20%, driven by more favourable weather and new capacity coming online.
Management expects first-half adjusted earnings per share (EPS) to rise 83% at the midpoint, to between 64-68p (forecast: 43.4p). The improvement reflects lower earnings seasonality as regulated network earnings makes up a larger share of its business mix. This shift has been driven by a 70% increase in network investments.
Full-year earnings per share guidance was reiterated at 168–193p (forecast: 183.5p), marking growth of around 18% at the midpoint.
The shares were broadly flat in early trading.
Our view
SSE delivered a positive first-half update, with favourable weather conditions and capacity additions helping Renewables output jump higher. Investment in its regulated networks also ramped up, making the group’s earnings profile less seasonal and driving strong first-half earnings growth.
SSE delivers electricity across Scotland and Southern England. This is classic utility territory – with revenues predictable and profits closely regulated. On top of that, it generates energy from gas-fired power plants and renewable sources, such as wind farms.
The group’s playing its part in the energy transition, with plans to spend £33bn in the five years to 2029/30 upgrading its energy infrastructure. Most of this total, about 80%, is set to be spent on its regulated UK electricity networks.
We like the growing focus on networks, which should see its regulated asset base grow by about 30% annually. Revenues here are tied to the value of the asset base and positively linked to inflation. That should help drive long-term growth while also improving the group’s resilience to tougher economic conditions.
Renewables remain a key, albeit relatively smaller part of the plan moving forward, with billions of pounds also set to be invested in expanding their capacity. But this 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 why more flexible gas-fired plants are still part of the energy mix. They complement the renewables segment well and are on hand to plug any shortfalls in energy output when adverse weather comes along.
The scale of the investment programme is likely to drag on cash flows in the near term, as returns lag the upfront spending. But the balance sheet is in good shape, and the group should be able to continue its spending plans without issues.
The government recently announced GB Grid, a publicly owned company aimed at increasing competition in the sector. It isn't expected to be operational before 2030, and its small scale, scope, and funding mean that it shouldn’t materially disrupt SSE’s long-term plans. We actually view the move as removing a layer of political risk hanging over the sector.
SSE’s investment programme is expected to drive much stronger earnings growth over the next few years. Despite this, the group still trades in line with its long-run earnings multiple. Alongside the ongoing structural shift towards networks with a more resilient earnings profile, we see scope for the multiple to expand. But this will rely on continued execution, and any meaningful delays or cost overruns on the buildout could weigh on investor returns.
Environmental, social and governance (ESG) risk
The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.
According to Sustainalytics, SSE’s management of ESG risk is strong.
It has a board-level committee overseeing ESG issues such as health, safety, and environmental programmes. SSE ceased operating its last coal plant in 2020, and it has a large pipeline of wind projects. However, there is new and existing gas- and oil-based capacity. The regulator has also fined it several times for breaches related to charges imposed on customers.
SSE key facts
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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 LSEG. 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.
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