SSE: Maintains Its Fiscal 2024 Guidance Despite Poor Weather Conditions; Shares a Bargain

We reiterate our GBX 2,200 fair value estimate after no-moat SSE 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.

SSE guides for fiscal first-half adjusted EPS of at least GBX 30, 28% below last year. First-half renewables output was 19% below the plan because of poor weather conditions, improving from the first quarter’s 29% shortfall. In total, there is now a 7% shortfall relative to the planned full-year output. Gas storage is expected to be loss-making in the first half versus a record profit in the year-ago semester, which was boosted by skyrocketing gas prices. The business is expected to move into the black in the second half when the gas is withdrawn from the storage to be sold. CCGTs have performed well, demonstrating that they are a good hedge against poor renewables conditions.

SSE confirmed its fiscal 2024 adjusted EPS guidance of more than GBX 150, in line with our GBX 152 that we maintain. It implies a 6% year-on-year decline and a 2% slide in the second half, lower than the 28% fall in the first half whose comparison basis was much higher.