SSE PLC – Encouraged by solid operational performance and strategic execution.

Perth, United Kingdom-based SSE PLC (LON: SSE) is a FTSE 100-listed integrated energy utility group, with investments and operations across Ireland and UK.

On 26 May 2021, SSE expects to announce the preliminary results for the year ended 31 March 2021.

Rationale for Valuation – Buy at GBX 1,355.50

• Over the next five years, the Company is planning to invest £7.5 billion in the low-carbon infrastructure, with a green economic recovery and help the UK transition to a net-zero future.
• The Company reported sharp growth in the EBITDA margin, which stood at 23.3% (FY20) as compared with the previous year (FY19: 13.6%). It is also higher against the industry median.
• The shares offer a lucrative dividend yield of 5.96%, with a minimum 10-years track record of consistent dividend payment.
• From a technical standpoint, 14-day RSI (48.94) is supporting the upside the potential.
• SSE is on track to realise nearly £2 billion from a disposals programme, creating further value for the Company.

Key Risks

• SSE is exposed to the risk of a fundamental change to the regulatory framework, which can have an adverse impact on the business and economic model.
• The Company operates in multiple geographies, and its profits can be impacted negatively due to the foreign exchange rate fluctuations.
• There are significant operational risks associated with Covid-19 related restrictions, geological and weather conditions.

Recent News

17 February 2021: SSE notified 26,632 shareholders had been elected to receive the interim dividend of 24.4 pence per ordinary share.

Q3 FY21 Trading Update (as on 2 February 2021)

(Source: Company Website)

• SSE anticipated adjusted EPS for FY21 to be in the range of 85 pence to 90 pence range, assuming normal weather conditions for the remainder of the year.
• SSE intended to recommend a full-year dividend of 80 pence per share.
• The Group made decent progress against the capital investment of £7.5 billion plan.
• It is also encouraged by the UK Government's renewed commitment to effective long-term carbon pricing.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

SSE is encouraged by the solid operational performance and the financial position is improving as it approaches the end of FY21. The progress of disposal programmes creating further value for the Company. Moreover, it has an established reputation in managing large capital projects and has a good position with respect to liquidity and financial management. The Company has also been investing in the green economic recovery and progressing the £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. The stock made a 52-week low and high of GBX 1,057.50 and GBX 1,621.50, respectively.

Based on solid operational performance, industry prospects and support from the valuation as done using the above method, we have given a “Buy” stance on SSE PLC at the current price of GBX 1,355.50 (as on 11 March 2021, before the market close at 10.35 AM GMT), with lower-double digit upside potential based on 18.00x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

United Utilities Group PLC (LON: UU.): Delivered a solid start to AMP7 post delivering operational transformation in AMP6.

United Utilities Group PLC is a FTSE-100 quoted Company, which is involved in water and wastewater services. It prominently serves in the North West of England, and it provides 1.8 billion litres of water every day to over 3 million business and homes.

On 27 May 2021, UU expects to announce FY21 results. The ex-dividend date for the FY21 final dividend is 24 June 2021.

Rationale for Valuation – Buy at GBX 881.20

• The proceeds of Tallinn Water’s stake will help UU improving customer services and drive a green recovery for the region.
• A3 stable credit ratings from Moody’s underpins a strong balance sheet.
• UU has given a strong start to the new regulatory period (AMP7) and maintained a progressive dividend policy by delivering a resilient operational performance.
• Over the past three years (H1 FY18 to H1 FY21), EBITDA margin and operating margin have remained above 57% and 30%, respectively, reflecting a decent operational performance.
• From a technical standpoint, 90-day RSI (48.55) reflects an uptrend in the stock.

Key Risks

• The performance can be impacted with ongoing Covid-19 challenges which can disturb the cash collection, operational delivery, and supply chain for water and wastewater services.
• The business is also exposed to the risks pertinent to failure of wastewater network, unfavourable price outcome, credit rating downgrades, unfunded projects, lower inflation, and competition in the bioresource market.

Recent News

3 February 2021: United Utilities sold a 35.3% stake in Tallinn Water for a cash consideration of EUR 100.26 million. The transaction is expected to complete in April 2021, subject to government approval and consent from the Competition Authority in Estonia.

Financial and Operational Highlights for the six months ended 30 September 2020 (as on 25 November 2020)

(Source: Company Website)

• The Company witnessed a strong operational performance during Covid-19, with robust cash collection, enhanced social tariff, confident in adequacy of 2019/20 provision, service levels maintained against higher domestic demand.
• It has generated a revenue of £894.40 million in H1 FY21, which was down by 4.4% year-on-year from £935.5 million in H1 FY20. The revenue was mainly affected due to average capital bill reduction.
• The Company witnessed strong and confident start of AMP7, with accelerating £500 million of AMP7 capex and extended by approximately £150 million through additional enhancement projects at Vyrnwy and Bolton.
• The Company already invested around £130 million last year, which is to drive better performance against the AMP7 ODIs (outcome delivery incentives) and improve the operational performance further. In FY21, the Company expects an ODI reward to be around £10 million.
• United Utilities has shown a strong balance sheet and low customer debtor risk, with stable Household bad debt and A3 stable credit rating (given by Moody’s).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

United Utilities Group has given a solid start to a new regulatory period, and it has successfully adapted to the challenging operating conditions. It has invested £130 million in the last year of AMP6 to meet the targets set against AMP7. The customer satisfaction score has remained high, which made them deliver a resilient operational performance and maintain a progressive dividend policy. As per guidance for FY21, the Company expects to report revenue in the range of £1.75 billion to £1.80 billion, which is reflecting a net impact of Covid-19 disruption over bill reduction and non-household consumption. The underlying finance expenses are anticipated to be lower year-on-year due to lower inflation. The stock made a 52-week low and high of GBX 743.00 and GBX 980.20, respectively.

Considering the strong and confident start to AMP7, good financial performance backed by the robust balance sheet, reaffirming AMP7 dividend policy, robust cash collection, fully funded pension scheme, solid momentum on strategic priorities, sustainable business model, improved profitability margins, and support from the valuation as done using the above method, we are currently maintaining the “Buy” stance at the current price of GBX 881.20 (as on 11 March 2021, before the market close at 10:45 AM GMT), with lower-double digit upside potential based on 22.12x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

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

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

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