SSE looks to greener pastures

SSE (SSE) saw its adjusted operating profit decline by 15 per cent year-on-year in the six months to 30 September, to £418m. This reflects a £115m blow from Covid-19, largely stemming from lower electricity demand and increased bad debts from business customers.

By contrast, statutory operating profit almost tripled to £985m. This was thanks to one-off gains from disposals, including selling a 25 per cent stake in its Walney offshore wind farm to Greencoat UK Wind (UKW) for £350m. SSE intends to divest over £2bn-worth of assets to help fund a £7.5bn investment in low carbon power over the next five years.

The group is looking to become the UK’s “pre-eminent green energy company”. Its current renewables pipeline would add over 500 megawatts (MW) of annual capacity over the next decade, but with the chance to win more upcoming seabed auctions, it hopes to lift this to 1 gigawatt (GW) of annual additions from the mid-2020s.

Amid ongoing investment in its electricity network and renewable assets, net debt has reached a staggering £10.6bn. But further disposal proceeds are expected to bring this down to around £9.5bn by the March year-end. SSE is handing shareholders an increased interim dividend and plans to recommend a full year payout of 80p per share plus retail price index (RPI) inflation.

The group is guiding that Covid-19 will knock around £200m off of its full year adjusted operating profit. RBC Capital Markets is forecasting a full year adjusted operating profit of £1.41bn, down from £1.49bn in 2020.

Beyond the pandemic, SSE should benefit from the UK’s ongoing push into renewable energy. But as with National Grid (NG.), it faces the threat of Ofgem potentially halving allowed returns between 2021 and 2026. The regulator’s final determination is due in December. Hold.

Last IC View: Hold, 1,381p, 17 Jun 2020