SSE: Diversity of profit sources proves to be a boon for utility

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Eighteen months ago SSE was in the eye of a storm. These can bring down power lines, minus power plants. However, the activists wanted break it. Longtime boss Alistair Phillips-Davies can feel justifiably warm and dry after holding his own.

Arguments in favor of a break focused on the “inefficient” structure of SSE. However, its diversity helped last year when the Russian invasion of Ukraine rocked energy markets. Today, its shares are trading at a forward earnings multiple of more than 12.5 times, cheaper than some European peers such as Iberdrola by 16 times, as well as National Grid by 15.7 times.

SSEThe thermal generation business was the biggest contributor to adjusted annual profit before tax, up 89 per cent to £2.2bn. The UK’s gas-fired power stations help meet demand for electricity when renewables such as wind and solar units cannot. SSE Thermal also owns gas storage facilities.

Profit growth at SSE’s renewable energy business, which was at the center of spin-off calls, was ironically dampened by insufficiently stormy weather conditions last year. A UK windfall tax on low-carbon electricity generators cost it £43m. Less diverse companies like Denmark’s Orsted have recently they fared less well.

SSE wants to expand its three units, including its regulated electricity networks in the UK. It upgraded investment plans to spend £18bn by 2026/27, although half of this will go to networks. Previously, SSE had targeted £12.5bn of capital investment by 2025/26. The strong performance last year also means that SSE will no longer have to sell a stake in its electricity distribution network business to finance its investments.

Don’t expect blue skies everywhere. SSE still has to deal with rising supply chain costs. In fact, the £2 billion of its investment plan update accounts for this. New projects in the UK are also facing delays in Secure network connections. SSE lacks exposure to the US, where clean energy companies are rallying to take advantage of the Cut Inflation Act.

However, SSE shares have done well so far this year, rising 12 percent. The icy wind of breakup calls could return. But by now SSE should have done enough to silence its critics.