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SSE stays in one piece

Big new renewables plan for energy company after calls for it to split its greener holdings from the distribution and transmission business
SSE stays in one piece
  • SSE will spend an extra £1bn on renewables capacity, looking to double this by 2026
  • Downside for investors is future dividend cut 

SSE (SSE) readied investors for a big update at its half-year results announcement, specifically dangling the possibility that the business would be split up. This was on the cards after an investment made by Elliott Management, under the direction of billionaire Paul Singer. The reality: no split. But SSE said it would dramatically increase its renewables capacity by 2026 and sell off minority stakes in its transmissions and distribution businesses. 

Chief executive Alistair Phillips-Davies said this did not amount to a “halfway house to full separation”, and under the plan this will only happen in the 2024 financial year. To hit the target of four gigawatts (GW) in renewables by 2026, which is double current capacity, SSE will spend another £1bn a year, with the forecast five-year capital commitment at £12.5bn. By 2031, the company wants to add 1GW in renewables capacity a year. 

Phillips-Davies said the plan would “create significant value” for both shareholders and “wider society”. Shareholders will have to stomach a major dividend cut in 2023/24, however, with the payout to be ‘rebased’ to 60p a share. The company paid out 81p in its last financial year. 

Asked why a full separation to created a British Ørsted (Den:ØRSTED) would not be a better approach, Phillips-Davies said SSE would have better access to finance and could help manage the added stress on the UK’s power networks would face from electric vehicle take-up and heat pumps while holding onto the distribution and transmission divisions. 

SSE’s shares were down 4 per cent on the new strategy announcement.

It also released its half-year numbers for the 2021 financial year, with an adjusted operating profit increase of 15 per cent on last year to £377m. The wind not blowing enough at the end of the period this hit the profitability of the renewables division, which saw output fall a quarter on a year ago to 1.1 terrawatt hours (TWh). 

But SSE said this was “more than offset” by higher volumes and revenue in the regulated networks division, which includes gas storage. Gas storage has been much sought-after in the UK in recent months, as prices shot up around Europe in reaction to limited supply and poor renewable power generation. 

Consensus estimates compiled by FactSet see adjusted earnings per share falling 5 per cent for the 2022 financial year, to 83p, before climbing to 100p in 2023. 

This new strategy marks a massive increase in renewables investment. Management said it could hit a 10 per cent-plus annual growth rate in adjusted cash profits even while pumping cash into the red-hot renewables sector, so it is certainly confident in these plans. There are still questions around this strategy – mainly how SSE will compete for profitable assets in a sector drawing massive investment from all over the world – but this looks a positive move overall, and its half-year results show the value of having an alternative profit stream to wind turbines. Hold. 

Last IC View: Hold, 1,602p, 10 Aug 2021

SSE (SSE)    
ORD PRICE:1,591pMARKET VALUE:£17bn
TOUCH:1,590-1,592p12-MONTH HIGH:1,690pLOW: 1,285p
DIVIDEND YIELD:5.2%PE RATIO:6
NET ASSET VALUE: 564pNET DEBT:£8.88bn
Half-year to 30 SeptTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
2020*2.810.7862.924.4
20213.541.6910425.5
% change+26+116+65+5
Ex-div:13 Jan   
Payment:10 Mar   
*Restated