EUR 850.00 For Business Accounts Only

Morningstar | SSE's Attractive Renewables Pipeline Offers Optionality

SSE’s profits are roughly evenly distributed between regulatory networks and liberalised power generation and energy supply activities. SSE’s wholesale generation unit operates roughly 10.5 gigawatts. We expect power generation to be the main earnings growth driver in the short- and medium term on account of increasing power prices, reinstatement of capacity payments, and the commissioning of new wind and gas capacity. SSE's regulated electric and gas networks operate within a quality regulatory regime with incentives that have historically allowed the group to earned at or near its allowed returns. Regulatory risk is still an issue that investors should heed. The new regulatory periods, or price controls, starting in 2021 for transmission and 2023 for distribution will likely drive returns cuts. SSE is the second-largest retail energy supplier in the United Kingdom behind Centrica. This activity accounts for roughly one fifth of the group's operating profit. Against a challenging competitive and regulatory backdrop, SSE decided in late 2017 to deconsolidate this business to merge it with Npower's retail division. After the deal was eventually scrapped in late 2018, the management still aims to sell it. We view SSE's diversified business profile as more appealing than pure regulated U.K. players United Utilities and National Grid because power generation mitigates networks' regulatory risk. A potential spin-off of SSE's attractive renewables assets and pipeline of projects could unlock hidden value.SSE's dividend of GBX 80 per share in fiscal 2020, following the retail business spin-off, constitutes a dividend yield of 5.8% based on our GBX 1,380 fair value estimate, above the 5.1% historical average. We view SSE shares as suitable for income seekers.