SSE plc (SSE) Ordinary 50p
HL comment (25 May 2022)
SSE reported full year underlying operating profit of £1.5bn, up 15%, reflecting higher allowed revenues, permitted by the regulator, in the Transmission business. A strong performance in Distribution and Thermal was also seen.
The group reiterated its commitment to increased investment in renewable energy. Plans to spend £12.5bn of strategic capital to 2026 are on track, with £2.1bn spent last year.
SSE has upgraded its earnings per share growth expectations over the 5 years to 2026, to 7-10%. The group also announced a final dividend of 60.2p.
The group's shares rose 4.6% following the announcement.
SSE's accelerating its pivot towards renewable energy. The group's expansion into Southern Europe is proof of management's conviction. But having more wind in the sails doesn't guarantee smoother seas. Performance in SSE's renewables division has left something to be desired so far. Despite improvements, output is still below targets.
SSE still relies on its core business for now.
That brings us to Networks, delivering electricity across Scotland and Southern England. It also owns high voltage transmission cables in the Scottish Highlands and Islands. 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. Remember dividends are variable and not guaranteed.
Regulated profits tend to be relatively predictable because prices are set in-line with wholesale costs. The group's benefiting from regulators' decision to increase the energy price cap as the crisis in Ukraine sends the cost of power higher. But the trade-off for this stability is minimal growth.
But the push for renewables puts utilities in a unique position to potentially enjoy steeper growth ahead.
Renewables made up less than half of underlying operating profits last year, but the plan is a fivefold increase in capacity to 50TW per year by 2031. This requires a substantial £12.5bn investment over the 5 years to 2026.
It comes with a hefty dose of risk. SSE's pouring money into a yet unproven part of the business. 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 the multi-billion pound 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. At some point there'll be no more fat to trim.
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.
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
- Price/Book ratio: 16.1
- 10 year average Price/Book ratio: 13.3
- Prospective dividend yield (next 12 months): 4.8%
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.
Full Year Results (underlying)
Transmission profits rose 72% to £380.5m, reflecting higher allowed revenues because of price control changes. Regulated Asset Value (RAV) rose to £4.1bn from £3.6bn. Total expenditure by Transmission is expected to reach at least £2.8bn, which would take Transmission RAV to over £5bn by the end of the current regulatory period.
The group also reiterated plans for the disposal of a minority stake. The sales process for a 25% share of the Transmission business is expected to start this Summer.
Operating profits were lower than expected in Distribution because of the impact of Covid, with losses expected to be recovered in the new financial year. Operating profit rose 28% to £351.8m overall. Customer satisfaction was broadly in line with last year, but has been held back by an "unprecedented" storm season.
Renewables underlying operating profit of £568.1m was 22% lower than last year because of reduced developer profits from a company SSE holds a 10% stake in. Excluding this, profits were broadly flat. There was a 7% decrease in output because of very still and dry summer weather.
Underlying operating profit at Thermal Energy rose 91% to £306.3m because of movements in the difference between the wholesale market price of electricity and its cost of production.
Looking ahead, SSE said its "focus continues to be on long-term, sustainable financial performance. With high levels of investment expected in Transmission, a step up in earnings expected in Thermal generation and an expected return to normal weather for Renewables, the Group is confident about delivering strong earnings growth for this financial year."
Adjusted net debt and hybrid capital fell to £8.6bn from £8.9bn.
The group saw a £576.5m benefit reflecting the completion of the sale of the 33.3% investment in SGN on 22 March 2022.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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