SSE was a Tempus top pick for 2021 and this column has rated it a “buy” since May 2019. In that time, the shares have climbed by 48 per cent.
The investment case is based on the reliable income stream from the FTSE 100 energy supplier’s dividend and the clear strategy to move away from fossil fuels and into renewables.
Both elements were on show yesterday when SSE reported results for the year to the end of March. It will make a final payout of 81p and “remains committed” to its five-year plan to pay dividends that increase in line with RPI inflation until 2023.
SSE also plans to start the sale this summer of its 33 per cent stake in SGN, which supplies gas to about six million properties in Scotland, the south of England and Northern Ireland, to be agreed this year.
Annual revenue was flat at £6.83 billion and pre-tax profit was more than four times higher at £2.52 billion, including £877.6 million of net gains from the sale of non-core assets. Covid-19 cost SSE about £170 million in operating profit as a result of reduced demand and some bad debts among business customers, but the total was towards the lower end of its initial estimated hit of £150 million to £250 million.
SSE owns energy networks, wind farms and gas-fired power plants and supplies gas and electricity to businesses. It sold its household supply division to Ovo Energy in January 2020. Asset sales are helping to fund its planned investments as it aims to treble its renewable energy generation capacity by 2030.
In June, SSE set a target of raising more than £2 billion from disposals and so far it has received £1.4 billion of cash proceeds. This financial year it expects to complete the sale of its North Sea gas fields, and the SGN sale will push it past the target.
The gas distribution network sits apart from its renewable electricity business, SSE said. The company bought 50 per cent of SGN in 2005 for £505 million, and in 2016, sold a 16.7 per cent stake to the Abu Dhabi Investment Authority for £621 million. Analysts at Jefferies say the remainder could fetch £1 billion.
SSE would also consider selling a minority stake in one of its electricity networks to help pay for its planned investments, Alistair Phillips-Davies, chief executive, said yesterday. It plans to invest £7.5 billion between 2020 and 2025, with 90 per cent going to power networks and wind farms. The total level of investment could be higher if SSE proceeds with plans for carbon capture plants and a pumped hydroelectric storage scheme at Coire Glas in the Highlands, which needs government support.
Investments in offshore wind farms include Dogger Bank in the North Sea, which it is working on alongside Equinor, Norway’s state oil company. It will be the world’s largest when completed, able to power six million homes. SSE is also developing Scotland’s largest offshore wind farm in Angus and has partnerships in Denmark and Spain.
SSE is backing other forms of low-carbon power generation. which are at an early stage, including carbon capture and storage, and hydrogen as an alternative to natural gas.
There are no carbon capture and storage (CCS) or hydrogen-fired power plants in the UK, and only a handful of demonstration projects worldwide. The risk is that the technology will remain too costly to be widely used. Yet the government, with its EU counterparts, is backing them as part of the solution to climate change and achieving net-zero carbon emissions by 2050.
By developing renewable energy generation capacity and investing in the electricity networks that will be essential for the electrification of the economy, Tempus believes SSE is well positioned for growth. In the immediate term, investors also have dividends to look forward to.
Advice Buy
Why Well positioned for the change in the energy mix away from fossil fuels and the commitment to its dividend
De La Rue
De La Rue has been around for 200 years, but unfortunately, even a licence to print money is not enough to guarantee a comfortable old age any more. The banknote printer is a year into a three-year turnaround, after a troubled period during which it lost the contract to make post-Brexit British passports and warned of doubts over its ability to continue.
However, the management team, which set out the turnaround plan in February 2020, are succeeding in reassuring investors and winning new business. A year ago, the shares were at a low of 37p, a fraction of the high of more than 630p in May 2017. They have now rallied to 193p, adding 29 per cent since Tempus rated the shares a “buy” in October.
There has been a steady flow of good news. The company completed a £100 million equity capital raise in July, and at the end of October, the Bank of England extended a contract to print British bank notes at De La Rue’s site in Essex. The company started making the Bank’s polymer notes in 2015, and said this year that more customers were switching from paper to polymer notes.
As a result, De La Rue increased planned investment in the material from £15 million to £20 million and has identified a site near Bolton, Lancashire, for a new production line, which could double output.
The company yesterday reported results for the year to the end of March. Revenue fell by 16 per cent to £397.4 million after the sale of its passport business the previous year, and its contract with HM Passport Office coming to an end during the financial year. Pre-tax profit dropped from £36.1 million to £9.9 million, dented by the cost of closing a printing facility in Gateshead.
Excluding one-off costs, operating profit was £38.1 million, ahead of the company’s forecast of £37 million. Net debt was halved to £52.3 million, helped by the summer’s equity raise.
De La Rue confirmed its intention to start paying a dividend by the end of its turnaround plan in the year to March 2023, if cash flow allows. With some way to go in reorganising the business and a good run in the shares over the past year, Tempus recommends holding the shares.
Advice Hold
Why The shares have climbed five-fold over the past year and the company is still in a turnaround period
