SSE Plc - Strong first half

SSE’s (LSE, SSE) Retail returned back into the black in the first half of the year while the regulated Networks business was dependable as always.  As such SSE offset a fall in Wholesale power generation profits to report a 40% overall uplift in the bottom line. 

SSE has three businesses which are Networks, Retail and Wholesale.  The Networks business covers gas distribution, electricity distribution and transmission and other related networks.

As these areas are natural monopolies the Networks business is regulated which means that it relies reliable profits for the group.  This was evident in the last financial full year (to 31st March) and in the first half of the current year.

The Networks business was the only one of the three divisions to see profits growth in both of these periods.  In the last full financial year the Retail business suffered a profits fall while in the first half of this year Wholesale saw profits drop.

In fact in the first half the Networks business contributed two-thirds of group operating profits.  This was up from the 44% contribution in the year to March 12 with the increase due to a significant fall in wholesale profits.

SSE notes that first half profits are much more volatile than the second half.  Meanwhile although H1 adjusted profits bounced back on last year they have only been restored to the level seen in 2012.

On the balance sheet side the group has an average debt maturity of 10.9 years with adjusted net debt and hybrid capital at £7.054bn as of March 12.  The group is committed to the criteria to maintain a single A credit rating.

SSE’s first half results on face value stand out for the jump in profits of over 40%.  However, this reflects a difficult first half of last year with the business only just overtaking first half profits seen in 2010.

Once again the reliability of the regulated Networks business has offset weakness elsewhere (in this instance Wholesale).  It is also notable that Retail returned to profit and has scope for margin expansion going forward.

SSE is aiming for dividend coverage over the medium term in the range of 1.5X.  Last year coverage was 1.4X but the strong first half results should bolster this in the current year even though the interim dividend was up 5%.

On a P/E basis the stock trades at 12.6X this year’s forecast earnings which falls to 12.4X for next year, 11.2X the year after and then 10.1X the following year.  The dividend yield for this year is 5.8% which increases to 6.1% next year.

The stock goes ex-dividend for the 25.2p interim payment on 23rd January 13.  The mix of a strong dividend supported by a stable network business and growth, through capital investment in networks and power generation, is keeping investors interested.

This article was produced by Senior Research Analyst, Andrew Latto.