SSE Downgraded by Analysts

More cautious profit estimates and regulatory risk have prompted a downgrade of the electricity supplier by Morningstar equity analysts

Morningstar Equity Analysts 5 December, 2017 | 3:21PM

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Morningstar equity analysts are reducing their fair value estimate for SSE (SSE) to £14.70 per share from £15.80, owing to more cautious profit estimates, chiefly because of retail supply activity. Shares look slightly undervalued at the current level around £13 a share.

We expect 2018 adjusted earnings per share (EPS) of 113p, versus the 116p guided by management. We are roughly in line with consensus over 2018/19 earnings, but 12% below it on average in 2020 and 2021. In line with our coverage of Centrica – which was sharply downgraded last week – we factor in a tariff freeze for those two years. We believe this is not priced into consensus expectations. The retail supply activity with Innogy is not taken into account and the merger could boost earnings, given £100 million of potential synergies flagged by SSE. Still, there is a risk that the competition authority will not clear the deal, as ownership of retail electricity market will become increasingly more concentrated.  

Our fair value estimate implies a dividend yield of 6.5%, which is above the 5.7% average of the last 10 years. Still, we believe this is justified by the uncertainty faced by UK utilities, which include a government-imposed price cap from next year. The management is committed to increasing the dividend at least in line with inflation in 2018 and 2019.

We reaffirm our narrow moat rating, which means the company has a slender competitive advantage. Altogether, we are confident that the company's earnings will exceed its cost of capital 10 years from now.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
SSE PLC1,190.00 GBX1.62

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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