ii view: SSE renewable power production breezes higher

First-half trading update to 30 September

ii round-up:

Power generator SSE (LSE:SSE) today detailed an improved if inline year-over-year renewable energy production performance, driven by windy weather and an ongoing expansion of turbine capacity. 

Earnings for the six months to late September are now expected to be more than 45p per share, ahead of City estimates of around 35p, and up from last year’s 37p. 

Shares in the FTSE 100 utility rose 1.5% in UK trading having come into this latest news up by almost a quarter over the last year. That’s similar to transmission provider National Grid (LSE:NG.). The FTSE 100 index itself is up around 11% over the last year. 

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SSE is one of the UK's largest renewable generators including its Dogger Bank wind farms in the North Sea as well as traditional gas-fired power plants.

The Perth, Scotland headquartered company left its forecasts for the year to late March unchanged. Coming into this latest news, analysts were forecasting earnings in the region of 159p. 

SSE’s thermal gas-powered operations are expected by management to make adjusted annual operating profits of at least £200 million for the half-year.  

No further update regarding recently announced delays in construction of the Dogger Bank field were given. SSE believes that this will make little material impact to expected project returns. 

Broker Morgan Stanley reiterated its overweight stance on the shares post the update, highlighting a price target of 2,250p per share. First-half results are scheduled for 13 November. 

ii view:

SSE (Scottish & Southern Energy) was formed via the merger of Southern Electric and Scottish Hydro Electric. Renewable operations today include 67 wind farms, 67 hydro schemes and five solar sites, generating around 4.5 gigawatt (GW), with 12 GW in the pipeline. Thermal operations include 14 flexible generation plants producing output of 6.2 megawatt of power. It also operates electricity transmission networks in the North of Scotland, as well as a distribution business in England and Scotland supplying over 3.9 million homes and businesses. 

For investors, renewable energy production is vulnerable to the weather. Regulatory reviews are a constant. Competition in the renewable energy field now includes oil giants such as Shell and Total, while a previous reduction in the dividend to fund renewable investment reduces the dividend yield from over 5% to around 3.5%.  

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To the upside, SSE ambition includes delivering over a fifth of the networks and offshore wind investments needed to meet the UK’s climate change targets. A diverse portfolio of generating and other assets is held. Moves overseas have including acquiring assets in Denmark, Spain and the Netherlands, while plans to increase the dividend now exist following the previous rebasing.    

In all, and with around two-thirds of revenue either regulated or already backed by existing government policy, and management pursuing a progressive dividend policy, SSE looks to remain worthy of its place in diversified portfolios. 

Positives

• Expanding asset base
• Diversity of operations

Negatives

• Subject to regulatory rulings
• Previous target of government windfall tax  

The average rating of stock market analysts:

Buy