SSE PLC

SSE PLC (SSE) is a Perth, United Kingdom-headquartered integrated energy utility company, with operations and investments across the UK and Ireland, including regulated electricity networks and renewable sources of energy. The group produces, stores, distributes and supplies gas, and generates, transmits, distributes and supplies electricity, with the bulk of profit coming from regulated electricity networks and renewable sources of energy. The operations of the group are differentiated in three operating segments, namely Retail, Networks and Wholesale. The company is a constituent of the FTSE 100 index.

Financial Highlights (FY 2019, in £m)

 (Source: Company Filings)

In the financial year 2019, dueto a significant decline in the revenue from the wholesale business operations of the group, revenue declined by 73% to £7,331.6 million against £27,250.4 million in FY 2018. The total operating profit (continuing operations) for FY 2019 was at £1,692.2 million against £1,157.4 million in FY 2018, while adjusted operating profit stood (continuing operations) at £979.5 million in FY 2019 against £1,400.2 million in FY 2018. The adjusted profit before tax stood at £725.7 million, which was down by 38% over the prior year, while reported profit before tax stood at £1,370.6 million in FY 2019, which was up by 59% from the previous year. The company’s adjusted earnings per share stood at 67.1 pence per share, which was down by 32% from the previous year and reported earnings per share stood at 135.2 pence per share, which was up by 110% from the previous year. In line with five-year dividend plan, the full-year dividend was 97.5 pence as the group proposed the final dividend of 68.2 pence.

Valuation Methodology
Method:  Price/Earnings Approach (NTM)

*Peers of the company are Centrica PLC, Drax Group PLC, Pennon Group PLC, National Grid PLC, United Utilities Group PLC and Severn Trent PLC.
*All forecasted figures and peers have been taken from Thomson Reuters.
 
Share Price Commentary

Daily Chart as at 11-September-19, before the market closed (Source: Thomson Reuters)

On 11 September 2019, at the time of writing the report (at 2:55 pm GMT, before the market closed), SSE stock was trading at GBX 1,152.5, up by 0.66 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,263.50/GBX 997.80. The company’s stock beta was 0.59, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £11.69 billion, with a dividend yield of 8.52 per cent.

Conclusion
The group has an established market position that enables the company to meet customer needs. It is one of the largest energy suppliers operating in the competitive energy markets in the UK and Ireland and has the most prominent renewable energy capacity across the region with approximately 3.8 GW capacity. A diversified and complementary generation portfolio allows the company to safeguard itself from market volatility, create sustainable returns and secure monetary benefits from renewable schemes; and enables it achieving the overall earnings and maximises returns. In line with five-year dividend plan, the group plans to deliver a full-year dividend of 80 pence per share. As the importance of the renewable energy in the market rises, the group plans to invest £1.0 billion in regulated electricity networks and renewable energy, which would be a part of £1.5 billion adjusted investment and capital expenditure. As the renewable output for 2019/20 has hedged at less than current market prices and expected to phase of profits in regulated electricity networks, group adjusted operating profit would be impacted, but is likely to increase.

Based on the above rationale, and supported by valuation undertaken using the above method, we have given a "HOLD" recommendation at the closing price of GBX 1,144.50 (as on 10 September 2019) based on 13.28x NTM Price/Earnings (approx.) on FY20E Earnings per share (approx.).

William Hill PLC

William Hill PLC (WMH) is Bristol, United Kingdom-headquartered betting and gaming company. The company, which was established in 1934, attracts millions of customers from around the world and is one of the most trusted brands in the industry. The UK is the home market for the group, but it is increasingly focusing on the international market, as it continues its strategy of creating a digitally led, internationally diverse gambling company, with a presence in eight countries worldwide and license in four regulated gambling markets. The company’s operations are differentiated in five operating segments: Retail, Online, US Existing, US Expansion, and Other.

Recent Development
The company on 5 September announced that Ulrik Bengtsson was appointed as the Chief Executive Officer Designate of the group, replacing Philip Bowcock, who will step down as Chief Executive Officer and as a Director of the Company with effect from 30 September 2019, signalling the intention of the group to become a digitally-led and internationally diverse gambling company.

Financial Highlights (H1 2019, in £m)
 
(Source: Company Filings)

Revenue of the group remained largely flat over the year as it rose by 1% to £811.7 million, against £802.9 million recorded in H1 2018, reflecting lower revenue in Retail due to the £2 stake limit on B2 gaming products. As the cost of sales remained unchanged, gross profit rose from £606.3 million in H1 2018 to £614.5 million in the current period. Adjusted operating profit fell by 33% to £76.2 million due to a 9% increase in net operating expenses, reflecting increased investment in the US business and increased in the cost from acquiring Mr Green. The proposed closure of around 700 shops and the implementation of the new £2 stake limit contributed to a statutory loss before tax of £63.5 million, while loss before interest and tax was £38.1 million, though losses declined considerably over the last year. Adjusted profit before tax declined to £50.8 million, reflecting a 47% fall. Statutory earnings per share was a loss per share of 7.1p (H1 2018: loss per share of 93.5p), while adjusted earnings per share fell by 42% to 5.3p, resulting in a 38% decrease in dividend per share to 2.66 pence. Closing net debt/EBITDA was 2.0x (26 June 2018: 0.8x and 1 January 2019: 1.0x), as the group issued corporate bond worth £170.2 million, and operating cash flows were £72.4 million.

Share Price Commentary

Daily Chart as at 11-September-19, before the market closed (Source: Thomson Reuters)

On 11 September 2019, at the time of writing the report (at 2:47 pm GMT, before the market closed), WMH stock was trading at GBX 186.15, up by 3.38 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 266.70/GBX 128.41. The company’s stock beta was 0.68, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £1.57 billion, with a dividend yield of 5.78 per cent.

Conclusion
As it was Year 1 of the new strategy and a period of transition, the financials of the group declined, but it was in line with the expectations of the management. The face of the global gambling industry has been radically changed by the emergence of digital gambling, opening many opportunities for companies like William Hill, which is in a decent position to take a leading position on the gambling world stage. High levels of innovation can prove attractive in other international markets, which augurs well for the company. With sports betting legal in eight US states, and two more to go live imminently, the group is on track to launch market-leading and proprietary sports technology platform, as the company scales up business in US sports betting.  With contribution from international markets increasing to 33% of total revenue, the group is diversifying online, ensuring a strategy of sustainable growth.

Based on the above rationale, we have given a "HOLD" recommendation at the closing price of GBX 180.05 (as on 10 September 2019).

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