SSE plc (OTCPK:SSEZF), a UK-based utility company with an integrated presence in regulated electricity networks and renewable energy generation, has come a long way since its public battle with activist investor Elliott in 2021. In recent months, SSE has continued to make headway in disproving the notion that a renewables business needs to be run separately, most recently reporting a solid set of interim results for H1 FY24. Despite coming in lower YoY, adjusted earnings per share came in well ahead of management guidance, supporting the path to FY24 EPS reaching (and potentially exceeding) SSE’s 150p/share target. Given the resilience in H1, as well as a favorable weather setup and traditionally back half-weighted reporting, this could well prove conservative.
Longer-term, there’s an interesting earnings growth story developing here as well, backed by a well-funded capex plan through FY27 focused on renewables and networks investments. In the meantime, investors also get paid a mid-single-digits % dividend yield. The upcoming UK renewables auction round is a potential upside catalyst for SSE (via the Seagreen 1A offshore wind farm joint venture), with a big hike to subsidies poised to bolster the renewables outlook.
Puts and Takes from the Interim P&L Report
SSE finished its fiscal half-year strongly, with adjusted operating profit only slightly lower YoY despite weather-related volume headwinds on the renewables and thermal sides and sub-inflation power pricing in the core regulated networks business. Similarly, adjusted EPS was lower YoY at 37p/share, though still ahead of consensus estimates and prior company guidance (>30p/share). While lower effective taxes played a part, SSE’s operational resilience was by far the dominant earnings driver overall.
Beyond the reported numbers, the company also hit several key renewables milestones, including the Dogger Bank A phase 1 (first power achieved; fully operational by Q3 2024) and Seagreen (commercially operational) offshore wind farms. The 443MW Viking onshore wind farm construction is also running ahead of schedule (all turbines installed) and is now on track for full commissioning by mid-2024.
Given the guidance-beating interim results and management expectations for the temporary H1 headwinds (weather and pricing) to reverse in H2, the reiterated >150p/share full-year earnings guidance seems conservative. Similarly, the improved near-term earnings outlook bodes well for SSE’s mid-term guidance bar, which remains unchanged at an adjusted EPS of 175-200p/share (implied 13-16% CAGR over FY23-27).
The quality of the mid to long-term earnings base will improve as well – backed by higher investments into its regulated asset base and offshore renewables business, SSE has guided toward ~60% of its adjusted EBITDA being indexed-linked and a further 15% contracted. Better earnings visibility entails potential dividend upside (currently at 60p/share for FY24 and growing 5-10%/year) and tends to be rewarded with multiple expansion over time. All fine and certainly positive for SSE’s appeal as a bond proxy, as future rate cuts pressure yields on equivalent UK government bonds.
Big Capex Plans Matched by a Well-Capitalized Balance Sheet
Alongside the H1 result, SSE also announced an incremental GBP2.5bn of capex to its mid-term plan, bringing its total outlay to GBP20.5bn over the Net Zero Acceleration Program (NZAP) period through FY27. For context, the NZAP plan, first laid out two years ago in response to activist pressure from Elliot Advisors to spin off its renewables assets, affirms the company’s commitment to a diversified business model (i.e., an integrated renewables and networks portfolio).
The added amount, while increasing the mix of regulated electricity networks to 55% (as a % share of total capex), doesn’t change SSE’s integrated utility goal. A slight bias toward the regulated side does, however, improve earnings visibility and accelerates growth in SSE’s regulated assets base to >GBP15bn (up from GBP12-14bn previously). The additional good news is that this hasn’t detracted from the higher-growth renewables side, where SSE remains on track for a significant ~5GW of renewables capacity additions.
The massive capex commitments are matched by a well-capitalized balance sheet. On the one hand, SSE maintains a net debt position, with adjusted net debt and hybrid capital coming in at GBP8.9bn in H1. Relative to EBITDA, on the other hand, net leverage runs well within the 3.5-4.0x target range (in line with its mid-term guidance) and comes with a very manageable profile (~4% average cost of debt and ~91% fixed). As the company has also termed out its debt stack (six-year average maturity), the current guidance for a 4.5% average cost of debt seems reasonable.
Given the cash flow upside from higher power prices and thermal generation profits in the short term, there’s flexibility to take on more debt as well. So even if net debt rises in dollar terms through the NZAP plus period, SSE should stay within its 3.5-4.0x guidance range without sacrificing capital returns. A step up in overseas investments also remains on the table, though SSE will need to prove itself here before the market assigns credit to its ex-UK growth potential. In the meantime, management has gone on record “reiterating commitment to target annual dividend increases of 5-10% to 2026/27, based on an expected 60 pence full-year dividend for 2023/24.” This should appease the income crowd, particularly if the Bank of England follows through with rate cuts next year, driving a wider yield differential vs longer duration Gilts.
Not Your Run-of-the-Mill Utility Company
Following a strong half-year performance, it was slightly surprising that SSE management didn’t raise its fiscal year earnings per share guidance. Maintaining a low bar does increase the probability of more beats and raises into H2, though, and keeps the stock interesting. In the meantime, investors get paid a sustained ~5% dividend yield (above long-duration Gilts) while retaining long-term growth optionality from a GBP20.5bn capex plan focused on building out SSE’s renewables and networks businesses. At ~11x earnings, SSE is a worthy consideration for income and growth investors alike.
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