ii view: SSE battles windfall tax worries with spending plan

Investing heavily in green energy and offering an attractive dividend yield. Buy, sell, or hold?

Full-year results to 31 March

• Adjusted operating profit up 15% to £1.53 billion
• Adjusted earnings per share up 22% to 95.4p
• Adjusted net debt down 3% to £8.6 billion
• Final dividend of 60.2p per share
• Total dividend for the year up 5.8% to 85.7p per share

Guidance:

• Expects full-year adjusted earnings per share of at least 120p

Chief executive Alistair Phillips-Davies said:

"This was a year in which our resilient business mix and balanced portfolio of assets helped us navigate volatile markets and meet our financial objectives whilst making record investments in the critical UK infrastructure needed to tackle climate change and deliver more secure, independent energy supplies.

“We are delivering major projects, building pipelines, and have made inroads in Southern Europe and Japan as we export our renewables capabilities internationally to fulfil SSE's considerable potential.”

ii round-up:

Renewable power generator SSE (LSE:SSE) today raised its earnings forecast for the year ahead as it flagged potential investment in the UK and Ireland’s vital infrastructure of over £25 billion this decade. 

A final dividend payment of 60.2p per share brings the total for the year to 85.7p, up from last year’s 81p per share. Annual earnings per share of 95.4p per share matched City forecasts, aided by a robust performance from its flexible gas thermal and hydro plants. 

These results follow yesterday’s press speculation regarding a possible inclusion of electricity company generators in a potential windfall tax plan. 

SSE shares rose by more than 5% having dropped by a similar amount the day before. That leaves its shares for the year-to-day up around 13%. Shares for rival power group’s Centrica (LSE:CNA) and Drax Group (LSE:DRX) are both up by more than 20% during 2022. The FTSE All Share index is down around 1.5%. 

• Panic as windfall tax threat extended to these power generators
• Investment trusts to play the energy transition 
• Renewable energy trusts take fright at potential windfall tax
• Recessions are becoming more likely – here’s how to invest

SSE forecasts adjusted earnings per share of at least 120p for the year ahead, aided by elevated inflation and a bringing online of new renewable energy generation facilities. That’s up from City estimates in the region of 109p per share. 

Capital expenditure and investment for the year ahead is expected to total more than £2.5 billion. In November, SSE outlined an additional investment of £12.5 billion up until 2026 in its renewable energy assets, the funding of which requires a scheduled cutting or rebasing of the dividend. A debasement to a total of 60p per share will be made from 2023/2024 followed by at least 5% increases in 2024/25 and 2025/26.

The Perth, Scotland headquartered utility recently initiated a sales process for a 25% share of its Scottish and Southern Electricity Networks (SSEN) transmission business. That follows a previous stake sale of its interest in Scotia Gas Networks (SGN). 

Adjusted net debt retreated 3% year-over-year to £8.6 billion. A first quarter trading update is scheduled for 21 July. 

ii view:

SSE (Scottish & Southern Energy) was formed from the merger of Southern Electric and Scottish Hydro Electric. Today it operates both regulated UK energy networks and renewable generation facilities. A small balance still comes from non-renewable generation and energy supply. New windfarm construction is ongoing with operations overseas also expanding.  

For investors, wind related energy production proved its vulnerability to weather conditions over this latest year, falling below management hopes. Concerns for a possible windfall tax now exist, while an upping of renewable energy asset investment requires a scheduled rebasing of the dividend. 

On the upside, SSE remains the UK’s biggest renewable energy generator with plans to invest and expand. The diversity of its operations is helping to balance out the volatility of its renewable output, while the shares, for now, sit on a forward dividend yield of over 4.5%. That's attractive in the current low if rising interest rate environment. On balance, and while some caution looks sensible given a more uncertain backdrop, climate change credentials still look to offer reason for longer term optimism. 

Positives

• Expanding renewable clean energy
• Attractive dividend payment (not guaranteed)

Negatives

• Subject to regulatory rulings
• Growing renewable energy competition  

The average rating of stock market analysts:

Buy