Company Reports

We confirm our GBX 2,200 fair value estimate after no-moat SSE narrowed its fiscal 2024 adjusted EPS guidance from above GBX 150 to a GBX 152 to GBX 160 range, bang in line with our GBX 156 estimate and involving a P/E of 10 reflecting the material undervaluation of the shares.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We confirm our GBX 2,200 fair value estimate after no-moat SSE released a trading statement for the third quarter of its 2024 fiscal year in which it confirmed its fiscal 2024 adjusted EPS guidance of more than GBX 150. It mentioned that the range of potential adjusted EPS is narrower than before due to lower-than-planned renewables output during the quarter. This suggests that the guidance was conservative in the first place. Fiscal 2024 P/E of 11 reflects the material undervaluation of the shares.

SSE is the only integrated British utility. Its wholesale generation unit operates roughly 10.8 gigawatts, of which 4 GW is of hydro and wind capacity. We expect renewables' power generation to be the main earnings growth driver on the commissioning of 5 GW of new onshore and offshore wind net capacity in the U.K. through fiscal 2028. In the meantime, renewables' contribution to the group's EBIT will increase from 23% to 46% on an adjusted basis.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

With the U.N. Climate Change Conference, otherwise known as COP28, that started on Nov. 30, we are reasserting our view that the market underappreciates utilities' critical role in limiting global warming.

We confirm our GBX 2,200 fair value estimate after no-moat SSE released first-half results above guidance, and it confirmed its fiscal 2024 and 2027 earnings guidance while increasing its transmission networks' investments, in line with National Grid. Shares are materially undervalued with a fiscal 2024 P/E of 11.3.

We reiterate our GBX 2,200 fair value estimate after no-moat SSE confirmed its fiscal 2024 guidance ahead of the publication of its second-quarter results on Nov. 15. Shares have been sold off recently because of the rise in interest rates, unjustified read-across from Orsted's U.S. woes, and the trimmed energy ambitions of the U.K. government leading to a fall in U.K. carbon prices. The shares are now materially undervalued with a fiscal 2024 P/E of 10 despite an attractive positioning. SSE's strong renewables footprint is supplemented by combined cycle gas turbines, or CCGTs, and transmission and distribution networks indexed to inflation.

European utilities have underperformed the European market by 4% year to date with most of the underperformance occurring in the third quarter because of the rise in interest rates. This overshadowed strong second-quarter results driven by the easing of the energy crisis, persisting commodity price volatility, and the hedging improvement. These drivers have persisted in the third quarter. Moreover, some power price clawbacks expired at the end of June like in Germany and Belgium. On the flip side, the comparison basis will be tougher as of the third quarter.

At round 5 of the U.K. contract-for-difference auctions on Sept. 8, 3.7 gigawatts of renewable capacity were awarded, one third of the amount awarded last year—1.9 GW was solar and 1.5 GW was onshore wind. No offshore wind capacity was cleared. This a blow to the U.K. goal to grow offshore wind capacity to 50 GW by 2030 from 14 GW currently. Still, no surprise here as many developers had warned that the ceiling strike price of GBP 44/MWh in 2012 prices of these auctions was way too low given the 40% increase in construction costs over the last year. Overall, the absence of awarded capacity reflects price discipline from developers.

No-moat SSE released a trading statement for the first quarter of its 2024 fiscal year. It maintained its annual EPS guidance despite poor wind and hydro conditions. We raise our fair value estimate to GBX 2,200 from GBX 2,020 on the back of a rise in our adjusted EPS by around 30% through fiscal 2028 due to the material guidance upgrade of last May. The relative positive valuation impact is mitigated by the inflation-driven increase in investments of the updated business plan. The current share price implies a fiscal 2024 P/E of 11.7, reflecting the undervaluation of the shares.

SSE is the only integrated British utility. Its wholesale generation unit operates roughly 10.8 gigawatts, of which 4 GW is of hydro and wind capacity. We expect renewables' power generation to be the main earnings growth driver on the commissioning of 5 GW of new onshore and offshore wind net capacity in the U.K. through fiscal 2028 and the rise in achieved power prices. In the meantime, renewables' contribution to the group's EBIT will increase from 23% to 49% on an adjusted basis.

No-moat SSE released fiscal 2023 results above expectations and set 2024 and 2027 guidance well above ours due to higher investments and power prices assumptions. The firm will pay a GBX 96.7 dividend on fiscal 2023 earnings, in line with the average annual U.K. retail price index rate, that is 12.9% higher than in fiscal 2022. SSE unexpectedly raised its dividend growth target from at least 5% to between 5% and 10% after the rebase to GBX 60 in fiscal 2024. This reflects an improving financial headroom thanks to higher earnings growth than expected.

We tweak our fair value estimate to GBX 2,020 from GBX 1,980 after no-moat SSE raised its fiscal 2023 earnings guidance for the second time in a row in its fourth-quarter trading statement. Fiscal 2023 results are due on May 24. The firm highlights that it will also update its future plans given strong growth prospects and the delivery of its net-zero acceleration program. This means that SSE will likely step up its renewable investments. It confirms that it will grow the dividend in line with the retail price index for fiscal 2023 involving a dividend of around GBX 93 and a 5.4% yield. However, the dividend will be rebased to GBX 60 next year, implying a 3.5% yield. All in all, shares are undervalued.

SSE is the only integrated British utility. Its wholesale generation unit operates roughly 9.2 gigawatts of which 5.9 GW of hydro and wind capacity. We expect renewables' power generation to be the main earnings growth driver on the commissioning of 3.2 GW of new onshore and offshore wind net capacity in the U.K. through fiscal 2027 and rise in achieved power prices. In the meantime, renewables' contribution to the group's EBIT will increase from 34% to 51% on an adjusted basis.

We don't expect to materially change our GBX 1,980 fair value estimate after no-moat SSE sharply raised its fiscal 2023 earnings guidance in its third-quarter trading statement. SSE has a strong renewables footprint supplemented by combined cycle gas turbines and transmission and distribution networks indexed to inflation and with significant growth opportunities in the wake of the energy transition. The group is almost fully exposed to the U.K. where political risk has stabilized. All in all, this attractive positioning is not fully priced in.

We tweak our fair value estimate to GBP 19.80 from GBP 19.30 after SSE agreed to sell 25% of its electricity transmission networks to Ontario Teachers for GBP 1.47 billion, implying a premium to the fiscal 2023 regulated asset value of nearly 80%. The transaction is expected to close shortly. Shares are undervalued.

SSE is the only integrated British utility. Its wholesale generation unit operates roughly 9.2 gigawatts of which 5.9 GW of hydro and wind capacity. We expect renewables' power generation to be the main earnings growth driver on the commissioning of 3.2 GW of new onshore and offshore wind net capacity in the U.K. through fiscal 2027 and rise in achieved power prices. In the meantime, renewables' contribution to the group's EBIT will increase from 34% to 51% on an adjusted basis.

SSE is the only integrated British utility. Its wholesale generation unit operates roughly 9.2 gigawatts of which 5.9 GW of hydro and wind capacity. We expect renewables' power generation to be the main earnings growth driver on the commissioning of 3.2 GW of new onshore and offshore wind net capacity in the U.K. through fiscal 2027 and rise in achieved power prices. In the meantime, renewables' contribution to the group's EBIT will increase from 34% to 51% on an adjusted basis.

On Nov. 17, U.K. Chancellor Jeremy Hunt presented a new budget aiming to restore the country's financial credibility. As expected, the levy on oil and gas companies implemented last May will be raised to 35% from 25% and extended from the end of 2025 to March 2028. In addition, a levy of 45% will be applied to low-carbon power producers as of January 2023. According to Reuters, this 45% levy will be applied to revenue made over GBP 75 per megawatt-hour.