ii view: renewables the future at SSE but watch the weather

Full-year trading update to 31 March

• Continues to expect full-year adjusted earnings per share of between 85p to 90p

Finance director Gregor Alexander said: 

"It has been a uniquely challenging year for us all, but, thanks to strong operational performance and delivery against our net-zero strategy throughout 2020/21, we are on course to meet our financial objectives for the year."

ii round-up:

Power generator and network operator SSE (LSE:SSE) downgraded its expected shortfall from renewable sources to 9% for the year due to unfavourable weather conditions.

A decline of 5% was flagged as of its third-quarter update. However, it also narrowed its expected hit from the pandemic to around £180 million compared to a previous forecast of up to £250 million.

SSE’s shares drifted just over 1% lower during the day following the update, still leaving them up over the past year by more than 10%. Shares for UK and US power network operator National Grid (LSE:NG.) are down by more than 5% over the last year.

The Perth, Scotland headquartered company also reiterated its expectation for full-year adjusted earnings to come in at between 85p to 90p per share. Net debt is now expected to materialise at around £9 billion.

The group continues to target the sale of over £2 billion of assets under its climate change strategic shift, with plans for the sale of its share stake in Scotia Gas Networks (SGN) ongoing. Under plans to triple its renewable energy output by 2030, it has also been seeking to buy assets overseas. Its bid for the Thor offshore wind farm in Denmark continues to progress, while it has recently formed an Iberian partnership with Acciona SA (XMAD:ANA) to further utilise its expertise and capabilities overseas. 

SSE intends to pay a dividend covering the year to 31 March 2021 of 80p per share plus inflation calculated using the Retail Price Index (RPI). That's in line with its 2018 five-year dividend policy. 

The company has now raised £2 billion in green bonds and will put its net zero transition plan to shareholders under a vote at its AGM come July. Full-year results are scheduled for 26 May. 

ii view:

SSE operates both regulated UK energy networks, accounting for around half of its earnings, and renewable generation making up most of the balance. Around 10% still comes from non-renewable generation, energy supply and other related energy services. The company is now the UK’s biggest renewable generator with a five-year £7.5 billion investment and capital expenditure plan being pursued.

For investors, reduced business demand for energy under lockdowns and the pandemic need to be remembered. Competition in the renewable energy arena is also increasing rapidly. Many of the oil majors such as BP (LSE:BP.) and Royal Dutch Shell B (LSE:RDSB) are now targeting renewable sources. This latest update also highlights the impact the weather can have on renewable generation. 

That said, oil and gas exploration used in once traditional electricity production is also susceptible to the weather. Its targeting of overseas assets looks to further underline its growing aspirations. And the planned total full–year dividend also leaves the shares on an income yield of over 5% (not guaranteed), difficult to ignore in an era of ultra-low interest rates. For now, and given its expanding green credentials and still highly attractive dividend return, the shares arguably remain fully worthy of continued investor support.     

Positives

• Expanding renewable clean energy
• Attractive dividend payment

Negatives

• Subject to regulatory rulings
• Growing renewable energy competition  

The average rating of stock market analysts:

Buy