SSE PLC

SSE PLC (SSE) 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. It is the only company on the exchange that is engaged in such a wide range of energy businesses. The company’s operations are differentiated in three operating segments: Retail, Networks and Wholesale.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Reports, Company Website)

In the first half of FY2019, total adjusted operating profit during the six months to 30 September 2018 declined by 24.4 per cent to £448.3 million, driven by the decline in operating profit in the wholesale and retail business segments. Total Reported operating profit declined by 130 per cent due to a decrease in Wholesale segment, reflecting reported operating loss in Energy Portfolio Management as a result of a negative impact of IFRS 9 mark-to-market remeasurements of negative £565.4 million on operating derivative contracts. Adjusted profit before tax declined by 40.9 per cent to £246.4 million, while reported profit/(loss) before tax decreased by 165% to a loss of £265.3 million. In the first half of FY 2019, the company's adjusted earnings per share were 19.6 pence as compared to 32.6 pence reported in the corresponding period of last year. The company’s adjusted net debt and hybrid capital stood at £9.9 billion on September 30, 2018 and is expected to be around £9.8 billion at 31 March 2019. 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.

Share Price Performance

Daily Chart as at April-12-19, before the market closed (Source: Thomson Reuters)

On 12th April 2019, at the time of writing (before the market closed, at GMT 12:05 PM), SSE shares were trading at GBX 1,139, down by 0.524 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,449.50/GBX 1,026.50.

Recent News
On 23^rd March 2019, Greencoat Renewables PLC raised its interest to 75%, from 50% by acquiring a 25% stake in Cloosh Valley Wind, alternative energy sources establishments, a unit of SSE PLC for a total consideration of €34.5 million.

Growth Perspective
Strategic and timely investments provide growth opportunities. In 2018, the company announced its plans toinvest GBP 6 billion across the UK and Ireland over the next five years. SSE upgrades electricity networks in the north of Scotland and central southern England; develops new renewable energy projects, including offshore wind in the UK; constructs a new combined cycle gas turbine power station with a capacity 840 MW at Keadby in Lincolnshire. Its substantial environmental hit is from the emission of the carbon dioxide from its generation assets; so, the company intends to support the transition to a low carbon energy system. Moreover, its operations are complemented bybusiness energy sales and flexible thermal generation.

Risk Assessments
Regulation remains the primary risk for utility markets, across all facets of SSE's business. SSE’s hedging policy should provide greater visibility, but SSE’s earnings remain exposed to wholesale volume and price risk.

Conclusion
SSE’s established market position through diversified and complementary generation portfolio, and operational and ownership interests in energy networks are its strengths, even as accidents could be a cause for concern. The company could benefit from investments, collaborations, and carbon intensity ambitions. However, competition, operational issues, seasonal variations and climatic conditions could affect its operations. Based on the strong fundamental performance we have given a “Hold” rating at the closing price of GBX 1,134 (as on 12th April 2019).
 

Polymetal International PLC

Polymetal International PLC (POLY) is a precious metals mining group based in Cyprus. The group is a leading gold and silver producer with a high-quality, low-cost asset base, and its portfolio comprises nine producing assets and three major development projects across Russia, Armenia and Kazakhstan. The group has five reportable segments: Magadan, Ural, Kazakhstan, Khabarovsk and Armenia.

Financial Highlights (FY 2018, US$ million)

(Source: Preliminary Results, Company Website)

In FY 2018, the company reported an increase of 4 per cent in the revenue to $1,882 million. The increase was mainly because of a 9 per cent rise in gold equivalent (GE) production. Although silver sales were down 3 per cent to 25.7 Moz, Gold sales increased by 10 per cent over the year to 1,198 Koz.Average realised prices declined for both the metals. The total cash costs for the year decreased by 1 per cent to $ 649/GE oz and was marginally less than the company's guidance of $650-700/GE oz. Adjusted EBITDA rose by 5 per cent to $780 million. The increase was due to a rise in production and stable cost. Net earnings remained flat at $355 million, against $354 million reported in FY 2017, while basic EPS declined by 5 per cent to $0.78 per share. Due to EBITDA growth and lower depreciation and income tax expenses, the underlying net earnings increased by 19 per cent to US$ 447 million, and underlying EPS rose by 14 per cent to $1 per share. The company announced a final dividend of US$ 0.31 per share (approx. $146 million), bringing the total dividend declared for FY 2018 to US$ 223 million, or US$ 0.48 per share, against $0.44 per share paid in FY 2017. Capital expenditure declined by 10 per cent over the year to $344 million.Despite investments, the company generated free cash flow worth US$ 176 million in FY 2018, against $143 million in FY 2017.

Share Price Performance

Daily Chart as at April-12-19, before the market closed (Source: Thomson Reuters)

On 12th April 2019, at the time of writing (before the market closed, at GMT 12.26 PM), POLY shares were trading at GBX 803.2, down by 1.30 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 900.57/GBX 593.80.

Recent News
On 13^th February 2019, the state-owned Bank VTB PAO acquired an 8.9% stake, or 41.774 million ordinary shares, in Polymetal International PLC, a Saint Petersburg-based gold ore mine operator.

Growth Perspective and Key Risks
The increasing demand for gold and silver in addition to the increasing gold and silver prices will have significant growth opportunities for the company and will enhance its business operations.The company expects to report strong operating performance in its first year of full production from Kyzyl with the production guidance remaining the same at 1.55 Moz and 1.6 Moz of GE for 2019 and 2020, respectively. As the company has a significant US Dollar-denominated floating rate borrowing,volatility in interest rate can adversely affect the company's financials. Fluctuations in currency can also lead to increased cost of imported capital goods and consumables. The acquisition will enable synergies with Lichkvaz deposit by employing processing hub approach, utilizing excess capacity at the Kapan concentrator; debottleneck underground mine and improve concentrator utilization, and to establish a strong operating platform to pursue further opportunities in Armenia. Due to frequentchanges in tax legislation in Russia, Kazakhstan and Armenia, lack of established practices in tax law means that additional costs such as taxes or penalties may occur.

Valuation Methodology

(Note: All forecasted figures and Peer selection have been taken from Thomson Reuters. All USD figures have been converted into GBP; USD: GBP - 0.76)

Conclusion
The company’s strong market position and asset base will allow to grow internally and expand internationally.However, potential threats like tax could lead to an additional tax accrued in the future. The company will be starting full production from Kyzyl which will help the company to reduce costs and report better results. Based on strong fundamental performance and the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 813.8 (as on 11^th April 2019) with single-digit upside potential based on 2.8x NTM Price/Book Value (approx.) on FY19E book value per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on Apr-12-19).

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