SSE Raises Its Fiscal 2023 Earnings Guidance

We tweak our fair value estimate to GBX 2,020 from GBX 1,980 after no-moat SSE 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 raised its fiscal 2023 adjusted EPS guidance from more than GBX 150 to more than GBX 160, 68% above fiscal 2022. In line with the guidance upgrade from last January, the main driver is the outstanding performance of combined-cycle gas turbines, which largely offset renewables’ output below budget and hedge buyback costs. The shortfall in renewable output increased from 10% below budget at the end of December to 13% below plan as at March 23. We suspect the increasing shortfall is more related to drought than wind conditions. The good performance of CCGTs, likely driven by expanding clean spark spreads, implies a positive read-across for Engie and RWE.

We raise our fiscal 2023 adjusted EPS estimates from GBX 120 to GBX 160, in line with the new guidance, which adds GBX 40 to our fair value estimate. As we still expect CCGTs’ profits to normalize as the energy crisis eases, our long-term estimates are not affected.

SSE expects net debt to land below GBP 9 billion at the end of March versus GBP 8.6 billion at the end of March 2022 and our GBP 9.5 billion estimate. However, SSE mentions that the GBP 9 billion figure excludes the 25% share of net debt in the transmission network subsidiary following the disposal of a 25% stake in it.