SSE Share Price Fall Excessive, say Analysts

Morningstar analysts expect to lower their fair value estimate for SSE after the profit warning from the FTSE 100 utility

Tancrede Fulop 12 September, 2018 | 2:16PM

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Shares in FTSE 100 utility company SSE (SSE) fell sharply as it warned on its 2019 financial year profits, owing to adverse weather conditions and high gas prices. As a result of the profit warning, Morningstar analysts will cut SSE's 2019 earnings estimates by a double-digit percentage and will reduce the fair value estimate by a mid-single-digit percentage.

For the moment, we reiterate our fair value estimate of £14.70 per share but we believe the share price reaction is excessive. The current share price is around £11.52 and the company has a four-star rating from Morningstar.

SSE guides that first-half operating profit will fall by around half year on year, while operating profit for the first five months is £190 million below budget, versus £80 million in the first quarter.

Unfavourable Market Conditions

The wholesale business is forecast to report an operating loss in the first half versus profit of £160 million last year. Key to that is the energy portfolio management business, which is guided to report a loss of £100 million in the first half and £300 million for the full year.

This division, created last year, is supposed to provide "effective risk management" for wholesale and other businesses. Poor performance is partly due to unfavourable market conditions and should not be extrapolated. Still, this also reflects poor trading performance and a source of risk underestimated by the market in our view.

The retail business' operating profit is expected to be break-even in the first half versus profit of £70 million last year, owing to warm weather and increasing gas costs not fully passed on to customers. SSE also mentions that the government price cap on energy bills, to be implemented next January, will result in retail operating profit significantly lower than the group's budget. We will lower our long-term retail profitability estimates to take the price cap into account.

Read-across from this profit warning is negative for the rest of the Big Six, including the leader Centrica (CNA). However, the impact for the latter should be mitigated by higher operating profit of the gas production business due to increasing gas prices. Also, the squeeze on profit margins to the end of 2018 will be less significant, as Centrica will implement a second tariff hike in October to offset increasing gas prices. Unfavourable wind conditions should also affect Utilities with sizeable wind production in Northern Europe – that is, Orsted, E.On, and Innogy.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
SSE PLC1,128.25 GBX0.51
About Author

Tancrede Fulop  is an Equity Analyst for Morningstar