SSE’s first-half revenue fell 6.9% to £4.5bn. Large tariff increases in Distribution linked to inflation over the last two financial years didn’t fully offset declines in the Transmission and Energy Markets (Trading) divisions.
Underlying operating profit rose 24.1% to £860mn. This was driven by the tariff increases and much improved Renewable energy output, while the Thermal division moved into loss-making territory. However, Thermal is still expected to be profitable over the 12-month period.
Free cash flow fell from an inflow of £1.2bn to an outflow of £46mn, due to lower levels of cash generated from operations and increased investment. Underlying net debt rose by £0.9bn to £9.8bn.
Full-year guidance remains unchanged.
CEO Alistair Philips-Davies has announced his intention to step down after 11 years at the top. He will remain in place until a successor is found to help ensure a smooth transition of power.
An interim dividend of 21.2p was announced, up 6%.
The shares were broadly flat in early trading.
Our view
The big news at SSE’s half-year results was that long-standing CEO Alistair Philips-Davies intends to step down. He’ll stick around until a successor is found and help oversee a smooth transition of power, but after 11 years in charge, there are some pretty big boots to fill.
Efforts to transition to a renewable energy powerhouse are progressing well. £1.3bn was invested over the first half, with around 90% of this directed towards building out its clean power infrastructure like electricity networks and renewables.
Turbo-charging focus to renewables is a bold and admirable move. But the shift comes with a hefty dose of risk - they're not always reliable. To some degree, it's at the mercy of mother nature.
That’s why more flexible gas-fired plants are still part of the energy mix. They complement the renewables segment well and are on hand to plug any shortfalls in energy output when adverse weather comes along. These assets were loss-making in the first half, but as the cold weather hits and energy demand rises, profitability is set to improve significantly in the second half.
On the regulated networks side of things, SSE delivers electricity across Scotland and Southern England. This is classic utility territory - with revenues predictable and profits closely regulated. A portion of these regulated revenues are positively related to investment levels, and are also protected against inflation. However, the additional return isn't received until sometime after the service has been delivered and investment has been made, which can cause a drag on cash flows in the meantime.
The group’s investment plans look achievable in our eyes but they're set to stretch the balance sheet, with the ratio of net debt to cash profits (EBITDA) likely to rise from 3.0x to between 3.5-4x in the medium term. While a moderate amount of debt isn't a bad thing, especially for a business with such reliable revenues, it does add pressure to keep delivering.
In recent years many areas of SSE's business have benefitted from high prices and increased price volatility. But with market conditions seemingly less turbulent this year, profits in the flexible thermal and gas storage division look set to drop substantially. Other areas of the business will have to step up to pay the investment bill. Any missteps on this front could dent investor sentiment.
The valuation remains below the long-run average at just 10.2 times this year’s expected earnings, which doesn’t look too demanding to us. We’re optimistic about the group’s long-term prospects. But in the near-to-medium term, SSE faces some uncertainty as it looks for a new leader and tries to navigate the challenges of building for the future.
Environmental, social and governance (ESG) risk
The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.
According to Sustainalytics, SSE’s management of ESG risk is strong.
It has a board-level committee overseeing ESG issues such as health, safety, and environmental programmes. SSE ceased operating its last coal plant in 2020, and it has a large pipeline of wind projects. However, there is new and existing gas- and oil-based capacity. The regulator has also fined it several times for breaches related to charges imposed on customers.
SSE key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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