It’s normally a whiff of news about SSE’s dividend that whips up investors, but this time it’s news of stake-building by Elliott Management, the activist investor said to be pushing for a separation of the energy group’s renewables business, that has nudged the shares higher.
You can see why some people have become excited. SSE has overhauled its business to focus on electricity networks and renewables, with an eye on government decarbonisation targets. It has the largest renewable energy portfolio in Britain and Ireland, including the world’s largest offshore wind farm at Dogger Bank, Scotland’s deepest offshore wind farm at Seagreen and one of Europe’s largest onshore wind farms at Viking.
This shift has pushed SSE’s shares almost to the five-year high touched in February last year, having outperformed all listed peers over the past 12 months. Those gains have given the group a forward enterprise value of almost 12 times ebitda (the metric of earnings before interest, taxes, depreciation and amortisation), which is at the top end achieved over the past decade.
Yet a standalone renewables business could attract an even higher rating. Look at Orsted, the pure-play Danish wind farm operator that has a forward EV/ebitda multiple closer to some technology stocks. Based on transactions already completed, SSE’s renewables business could have an enterprise value of about 16 times forecast ebitda for this year, according to RBC Capital.
But what about the beefy dividend that SSE pays? It is forecast to be 83.13p this year, equivalent to a yield of about 5 per cent at the present share price. Annual rises linked to RPI inflation until 2023 provide added allure.
True, regulated returns from the electricity networks business provide a more consistent cashflow than volatile renewables. SSE is hoping to boost its transmission business’s regulated asset value alone from £3.6 billion to £6 billion by 2026. Its projects include a subsea power cable to link Shetland with mainland Scotland, and it is eyeing investment in links to deliver clean energy from Scottish wind assets.
Nobody has said that a separate renewables business would need to pay a dividend — many high-growth stocks do not — and even with the renewables unit still bolted on, there’s a case for SSE being forced to rebase its dividend after the five-year returns plan comes to an end (last year’s return was backed less than 1.1 times by adjusted earnings).
What about financial strength in numbers? Two entities with reduced scale could negatively affect the credit rating and the ability to gain new finance, JP Morgan reckons. Asset-rich utility groups generally carry higher debt, but at 4.6 times ebitda at the end of March, SSE doesn’t have too much wriggle room to stay within its target range.
Disposals have generated a good chunk of funds used to fund capital expenditure, more than £2 billion banked since June last year. Cashflow from electricity networks helped to build the renewables asset base, but note that renewables are not the biggest guzzlers of capital, at 20 per cent to 30 per cent of overall capital expenditure in recent years. And there’s no shortage of patient capital willing to plough cash into green investments, which would make joint ventures or tapping markets for cash easier avenues for finance.
SSE is readying its defences. In November it is expected to announce bigger capital expenditure plans. That could mean the £7.5 billion target for 2025 is raised again. Whether Elliott succeeds or not, the growing scale of SSE’s renewables means that there are grounds to push its earnings multiple higher.
ADVICE Buy
WHY Returns that stand to be generated by SSE’s renewables division could spark a re-rating, and the dividend is attractive
Supermarket Income Reit
Accounting rules are a bore, but for investors in Supermarket Income Reit they are the key to rising returns. The appearance of lease liabilities on supermarket balance sheets has prompted more grocers to start buying back their stores, as the cost of debt is more attractive than retail leases.
Higher demand means increased property values, which for the supermarket landlord translated into an 8.5 per cent rise in the underlying value of the real estate investment trust’s portfolio last year. Those gains helped to push the Reit’s EPRA net tangible asset value up 7 per cent, ahead of analysts’ forecasts.
Yet if supermarket valuations are rising, it also means that the commercial landlord is having to stump up more for acquisitions — and it is very acquisitive. The portfolio has doubled in size over the past 12 months, with 20 stores bought for a total of £541 million, partly funded by two equity-raisings generating £341 million.
Income potential is the big attraction to shareholders, and it’s why the shares have been afforded a premium of roughly 8 per cent to even forecast NAV at the end of June next year. The payment is progressive and increases in line with inflation. For the 2021 financial year it paid 5.6p a share and is targeting 5.9p this year, which would leave the shares yielding about 4.9 per cent at the present 119¾p price.
In contrast with the broader retail property sector, those quarterly dividends are backed by a secure rental income stream. Rent collection was at 95.5 per cent last year and about 90 per cent of rents have fixed, upward-only uplifts or inflation-linked rises.
The loan-to-value ratio is comfortable enough at 34 per cent, around the midpoint of the target range. It still has just over £155 million in undrawn debt to access, but investors should expect further fundraisings once potential acquisitions are nailed down.
Analysts expect the Reit’s asset value to continue its trajectory. Liberum forecasts a net tangible asset value of 110p a share at the end of next year, rising to 114p at the same time in 2023. The shares aren’t cheap, but the reliability of the income should compensate.
ADVICE Buy
WHY Generous dividend yield backed by secure income
