SSE PLC is a Scottish energy company engaged in production, distribution and supply of gas and other energy services, as well as generation, transmission, distribution and supply of electricity in Great Britain and Ireland. The group was founded through the merger of Scottish Hydro Electric and Southern Electric in 1998 and is the UK’s largest generator of renewable energy. The company’s shares are listed on the London Stock Exchange and a part of FTSE 100 index. It is the only company on the exchange that is engaged in such a wide range of energy businesses. The group employs 20,000 personnel for its operations.
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Key Statistics


Management
Richard Gillingwater CBE is the Chairman of the Board. He joined the board in May 2007 and was appointed as the chairman in July 2015. The current Chief Executive Officer is Alistair Phillips-Davies, he was appointed to the position in July 2013. Gregor Alexander is the Finance Director and has extensive knowledge of financial markets.

Segments
The company’s operations are differentiated in three operating segments: Retail, Networks and Wholesale. The Networks segments includes electricity distribution, electricity transmission and gas distribution and primarily operates in the North of Scotland and the South of England, distributing electricity to customer premises. Retail segments includes energy supply, enterprise and energy-related services, and is engaged in supplying gas and electricity to business and residential customers in the United Kingdom and Ireland. The Wholesale segment comprises of energy portfolio management, electricity generation, gas storage, gas production and the procurement of other commodity requirements in United Kingdom, Ireland and Europe.

Top Shareholders
 
(Source: Thomson Reuters)

Recent Developments
On 1st February 2019, the company announced that it had agreed to sell a 49.9% stake in its Stronelairg and Dunmaglass wind farms for a total consideration of £635 million. The deal was agreed with Greencoat UK Wind PLC and will equate to 160.6 megawatts of capacity. The transaction is expected to be completed by the end of March 2019, and the proceeds will be used for the buyback programme and to reduce debt.
Financial Highlights (H1 FY19, in £m)

(Source: Company Filings)

In the first half of FY 2019, the company's financials were slightly ahead of the company's guidance but were considerably less than what the company had forecast at the start of the year. Total adjusted operating profit/(loss) during the six months to 30 September 2018 declined by 24.4% to £448.3 million, driven by higher than expected gas prices and dry warm weather. The output of renewable energy was lower than expected and expected gas prices were higher. A substantial hit was taken by the Wholesale segment which reported a decrease of 98.6% in adjusted operating profits. The decline was due to a fall in Electricity Generation and Energy Portfolio Management, which was driven by lower renewable profits and lower achieved power prices. Total Reported operating profit /(loss) declined by 130% due to a decrease in Wholesale segment, reflecting reported operating loss in Energy Portfolio Management, due to a negative impact of IFRS 9 mark-to-market remeasurements of £565.4 million on operating derivative contracts. Adjusted profit before tax declined by 40.9% to £246.4 million, while reported profit/(loss) before tax decreased by 165% to a loss of £265.3 million, reflecting poor top-line numbers. In the first half of FY 2019, company's adjusted earnings per share were 19.6p, compared to 32.6p reported in the corresponding period last year, while reported/basic loss per share was reported at 22.6 pence per share. The company’s adjusted net debt and hybrid capital was £9.9bn at 30 September 2018 and is expected to be around £9.8bn at 31 March 2019, while unadjusted net debt at the end of the first half increased by 28.2% to £9,410.3 million. The level of debt is due to the company's ongoing investment programme and the rise in debt is consistent with that of previous years.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
Apart from gross and EBITDA margin, profitability margins declined in the first half of FY 2019. This was due to price pressures and a decline in production. Moreover, due to competitive pressures anticipated and the impact of the Default Tariff Cap from 1 January 2019, its household Energy Supply Business will report an adjusted operating profit margin of between 2% and 3% for FY 2019, against 6.8% in the year ended 31 March 2018. The quick ratio was slightly above the industry median, highlighting more cash is available with the company. The group was more leveraged than its competitors and increased its debt during the period, though the increased debt was due to the investment purposes. The asset turnover ratio, though in line with the industry median, fell considerably in H1 FY2019. 

Valuation Methodology
Method 1: Price/Book Value Multiple Approach (NTM)  


To compare SSE with its peers, Price/Book Value multiple has been used. The peers are United Utilities Group PLC(NTM P/B was 1.91), Pennon Group PLC(NTM P/B was 1.96),Centrica PLC(NTM P/B was 2.1) and Severn Trent PLC(NTM P/B was 4.45). The mean of Price/Book Value (NTM) of the company’s peers was 2.7x (approx.).

Method 2: EV/Sales Multiple Approach (NTM)


To compare SSE with its peers, EV/Sales multiple has been used. The peers are Drax Group PLC(NTM EV/Sales was 0.39), Centrica PLC(NTM EV/Sales was 0.38),Veolia Environnement SA(NTM EV/Sales was 0.83), National Grid PLC(NTM EV/Sales was 3.49) and Pennon Group PLC(NTM EV/Sales was 4.3). The median of EV/Sales (NTM) of the company’s peers was 0.81x (approx.).

*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at Mar-27-19, before the market close (Source: Thomson Reuters)
 
On 27th March 2019, at the time of writing (before the market close, at 10:30 am), SSE shares were trading at GBX 1,211, down by 0.9 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,449.50/GBX 1,026.50. At the time of writing, the share was trading 16.45 per cent lower than its 52w High and 17.97 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 2,421,728.40; 30 days - 2,504,983.30 and 90 days - 2,956,673.97. The average traded volume for 5 days was down by 3.32 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 17.8x as compared to the industry median of 11.6x. The company’s stock beta was 0.67, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £12.7 billion and a dividend yield of 7.82 per cent. 
    
Risks Assessment and Growth Prospects 
Even though the latest results reported by the company were not as expected, the company continues to make good progress in its core businesses of regulated energy networks and renewable energy, in which it has a clear strategy and good long-term prospects. Moreover, its operations are complemented by business energy sales and flexible thermal generation. The group has also started taking its low-performing, non-core assets seriously, as can be seen with the recent sales of stakes in its telecom business and selected onshore wind farms with expected proceeds of over £1 billion. Keeping in mind serious headwinds faced in the Energy Services business, the company is making progress in assessing the options for its future. However, a price cap proposed by the industry watchdog Ofgem will significantly impact the company's financials, especially the group's SSE Energy Services retail business. Moreover, wholesale prices have increased, and the consumption and production of renewables have dropped.
 
Conclusion
The company’s core businesses of regulated energy networks and renewable energy continues to make good progress. The company is also making investments in renewable energy and has started selling non-core divisions. Based on strong prospects supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 1,222 (as on 26th March 2019) with double-digit upside potential based on 2.70x NTM Price/Book Value (approx.) on FY19E Book Valueper share and 0.81x NTM EV/Sales (approx.) on FY19E Sales.
 
*The buy recommendation is valid for the current price as covered in the report (as on Mar-27-19).
 

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