SSE Earnings: Keeps Guidance Despite Poor Wind, Hydro Conditions; Lifting Fair Value 9% to GBX 2,200

No-moat SSE 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.

During the first quarter of fiscal 2024, that is from April to June, onshore wind output fell 37% because of poor wind conditions. Offshore wind output increased by 45% thanks to the ramp-up of the Seagreen wind farm. However, it was 16% short of the budget because of the wind conditions. This involves a negative read-across for the second-quarter results of Orsted and RWE. Hydro output tumbled 42% because of dry conditions. Overall, first-quarter total renewables output implies a 5% shortfall to the fiscal 2024 planned output. Still, SSE retains its fiscal 2024 adjusted EPS guidance of GBX 150—suggesting it was a bit conservative in the first place, or that the output shortfall was offset by high clean spark spreads.

Our new estimates point to a 2023-28 EBIT CAGR of 1.6%, as the commissioning of 5 gigawatts of renewables capacity will be mitigated by the normalization of profits from thermal assets that posted record results in fiscal 2023 and the decline of power prices toward our GBP 60 per megawatt-hour midcycle assumption. In the meantime, adjusted EPS would decrease by 2.8% annually on average as the EBIT growth will be largely dwarfed by rising depreciation and financial costs from high investments and incremental debt required to fund them. Our fiscal 2027 adjusted EPS of GBX 155 is short of the GBX 175-GBX 200 guidance range, as the group assumes power prices of GBP 85/MWh.