SSE PLC (LON: SSE) – Well placed to deliver long-term success and pay dividends

SSE PLC is a UK based energy group that is engaged in the business of regulated electricity networks and renewable sources of electricity. The Company generates renewable electricity in the UK and Ireland, and it is one of the largest electricity network company in the UK. The Company develops, owns and operates low carbon infrastructure and supports the zero-carbon transition. The power generation assets of SSE include onshore and offshore wind, hydropower, electricity transmission and distribution grids, efficient gas and energy from waste. The Company has employed close to 12,000 people in the UK and Ireland. SSE is listed on the FTSE-100 index. On 18 November 2020, the Company will release the interim results for the six months to 30 September 2020.

(Source: Company website)

Growth Prospects and Risk Assessment

SSE PLC is a growth-oriented company and considers significant opportunities for investment. The Company has planned a capital investment of £7.5 billion over five years until 2025. The business plan for the Transmission segment includes £2.4 billion in total expenditure across the RIIO-T2 price control between FY21 and FY26. The investment will help the Company to deliver disruptive and innovative utility services. SSE is focussed on the successful development and efficient operation of electricity infrastructure that supports the transition to net-zero through responsible ownership. The Company is disposing of the non-core assets where SSE is not the main operator or if the project is less aligned with the transition to net-zero.  

The Company is focussed on renewable projects, and it believes that these projects will generate a significant value for the Company in the future. The Company expects the completion of the offshore Seagreen wind farm in December 2022, and it is targeting first export from Dodger Bank wind farm in Q3 2023. Once these farms are online, they will contribute immensely to the growth. SSE is using advanced turbine technology and wind power technology that is contributing to the transition to net-zero.

The Company has a business goal to cut the carbon intensity by 60% and develop renewable energy infrastructure to contribute 30TWh a year of renewable output by 2030. It is also focussed on building an electricity network that provides the infrastructure to support 10 million electric vehicles.

 (Source: Company website)

The Company generates power, and if its operation leads to climate change, such as an adverse effect on weather or impacts the natural environment, it will distress the business environment. The fluctuation in the price or volume of the crucial commodities such as electricity, oil and gas can lower the margins. The geopolitical events, including Brexit, can affect the business of the Company. Cyber Security threat if the network or core systems of the Company is compromised. Any failure in the energy supply infrastructure can interrupt the power generation and supply.

Industry Outlook Dynamics

The global energy industry is targeting clean energy, and the goal is to make available reliable, sustainable and clean energy for all. The UK has set a target for net-zero greenhouse gas emission by 2050, and it is the first country that has legislated for net-zero greenhouse gas emission. The annual demand for electricity in Great Britain is expected to grow from 300TWh to 600TWh by 2050, and the electricity sector is anticipated to be the first sector to decarbonize with a net-zero emission before 2040. The wind power technology in renewable is developing fast, and the costs are falling, which is supported by the advancement in technology. In windy areas such as the UK and Ireland, it is one of the cheapest forms of power generation. In the UK from 2021, onshore wind and solar will be eligible for competition for CfD contracts in addition to other renewable technologies such as offshore wind. In Ireland, the new Renewable Electricity Support Scheme (RESS) will support the electricity ambition of up to 70% power generation through renewable.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of SSE Plc.

 

Recent News

On 15 October 2020: The Company has confirmed that Martin Pibworth has been elevated to the newly created role of Group Energy and Commercial Director, which was effective from 1 November 2020.

On 13 October 2020: SSE stated that it had entered into an agreement to sell the 50% share in Ferrybridge and Skelton Grange multifuel assets, for a total cash consideration of £995 million. This would be complete by late 2020.

On 1 September 2020: The Company stated that it has agreed to sell the 25.1% non-operating stake in Walney Offshore Wind Farm to UKW (Greencoat UK Wind Plc), at a total consideration of £350 million.

Key Performance Indicators (FY20)

(Source: Company Website)

 A Glimpse of Business Segments (FY20)

Trading Update (as on 30 September 2020)

• The Company has raised more than £2 billion from hybrid capital securities and conventional euro bonds. From this, the Company does not need any refinancing or funding requirements until the next two years.
• During the six months to 30 September 2020, SSE continued to make strategic progress and perform well operationally, with £7.5 billion of an investment plan.
• The impact of COVID-19 on the operating profit remained in line with anticipations, and the total operating profit for six months to 30 September 2020 is expected to be in the range of £120-£130 million.
• The Company planned to sell the financial interests in the Walney offshore wind farm for £350 million and also reached an agreement to sell the stake in MapleCo for approximately £90 million.
• SSE expects a full-year dividend per share of 80 pence plus RPI inflation in FY21, with an interim dividend per share of 24.4 pence.
• Moreover, it has an established reputation in managing large capital projects and has a good position with respect to liquidity and financial management.
• For the first half of 2021, SSE expects to report adjusted earnings per share in the range 10 pence to 12.5 pence. Further, the total operating profit for the financial year 2021 expected to be in the range of £150-£250 million before mitigation.
• The Company has a £7.5 billion capex plan of low-carbon investments.
• Overall, SSE is well placed to play a significant part in helping the UK to complete the transition to net-zero emissions.

Operational Highlights for Q1 FY21 (for the three months to 30 June 2020, as on 16 July 2020)

• In thermal business, the Company recorded electricity generation of 4,260 gigawatt hours in Q1 FY20, an increase from 3,810 gigawatt hours recorded a year before.
• The Company successfully issued new hybrid capital securities with an all-in funding cost of just under 3.8% per annum.
• During Q1 FY21, the Company’s renewable energy business saw energy output of 1,988 gigawatt hours, a decrease from 2,352 gigawatt hours planned for the quarter and 1,879 gigawatt hours recorded a year before.
• Moreover, it has an established reputation in managing large capital projects and has a good position with respect to liquidity and financial management.

Financial Highlights (for the year ended 31 March 2020 (FY20), as on 9 July 2020)

(Source: Company Website)

• FY20 was a year of recovery and financial progress for SSE, with an increase in adjusted profit before tax and adjusted operating profit.
• It also increased the focus on the core businesses of regulated electricity networks and renewable energy.
• Operationally, the Company made substantial progress towards the strategic priorities and ambition to be a leading energy Group in a net-zero world.
• The full-year dividend for 2019/20 was in line with the five-year dividend plan set out by SSE in 2018. The final dividend per share was 56 pence, representing a full-year dividend per share of 80 pence.

Financial Ratios

Share Price Performance Analysis

On 13 November 2020, at the time of writing (before the market close, at 10:35 AM GMT), SSE Plc shares were trading at GBX 1,368.61, down by 0.39% against the previous day closing price. Stock 52-week High was GBX 1,703.00 and Low of GBX 1,057.50, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 20-day SMA (GBX 1,323.0). MACD line is placed above the central line, indicating a bullish setup.

Based on 2-years performance, SSE has outperformed the FTSE-100 Index and the FTSE All-Share Electricity Price Return Index. SSE generated a return of around 21.21%, whereas the FTSE All-Share Electricity Price Return Index generated a return of 15.56% and FTSE-100 Index earned a return of -10.67%

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

SSE expects some of its businesses to get temporarily affected by the pandemic, with major impact in the first half of the financial year. In FY21, the operating profit is expected to be affected in between £150 million and £250 million due to covid-19, and it expects the impact of the bad loan on the customer business. The Company has hedged a significant portion of its position in the wind and hydro energy in the renewable segment. The Company has highlighted that it will maintain a good liquidity position in FY21, and it has reduced the planned cash outflow that includes the capital investment by £250 million for FY21. The Company is expected to generate a value of £2 billion by autumn 2021 through the sale of assets. It will target a Net debt/ EBITDA ratio of close to 4.5x in between FY21 and FY24.

SSE is a dividend-paying stock, and it acknowledges the fact that a large number of pensioners and savers are dependent on the dividend of the Company for income.  It targets a full-year dividend of 80 pence per share along with retail price index inflation in FY21. The Company has already announced an interim dividend of 24.4 pence per share for FY21.

(Source: Company website)

Considering the good track record of dividend, signs of recovery, decent operating & financial performance, the transition to a net-zero economy, good progress on both the disposals programme and the significant low-carbon investment opportunities, strong balance sheet, high level of cash generation capabilities, robust performance in SSE Renewables, and support from the valuation as done using the above method, we have given a “Buy” recommendation on SSE at the current price of GBX 1,368.61 (as on 13 November 2020, before the market close at 10:35 AM GMT), with lower-double digit upside potential based on 11.85x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

 

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

*Dividend Yield may vary as per the stock price movement.

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