Eight miles off the Caithness coast in the Moray Firth, SSE has just installed the 84th and final turbine of the Beatrice offshore wind farm (Emily Gosden writes). When the £2.6 billion, 588-megawatt project is fully running this summer, it should generate enough electricity to power 450,000 homes — and enough cash to make a healthy return for the energy group.
In 2014, the government awarded a contract guaranteeing SSE an inflation-linked price of £140 for every megawatt-hour (MWh) of electricity that Beatrice generates — more than £158 in today’s money, or roughly treble present market prices. The project, of which SSE owns 40 per cent, could be in line for £250 million a year in subsidies.
Shortly before it won the contract, SSE had a very public wobble over the prospects for offshore wind, putting projects on hold and questioning the sector’s viability amid high costs. The fears proved to be unfounded: costs fell precipitously, aided by the development of bigger, more powerful turbines. Projects with high subsidies like Beatrice now look very lucrative, and the prospects for the industry look bright.
SSE is now pinning its growth prospects on plans to build many, many more offshore turbines. The plans hinge on government auctions to award subsidy contracts, the latest of which kicked off yesterday. Ministers have budgeted for up to £60 million a year and say that could fund six gigawatts of new turbines. Electricity prices have been capped at only £56/MWh for projects starting up in 2023-24, falling to £53 in 2024-45 (in 2012 money). The results and price will not be known until later this year, but SSE is in a position to win big: of seven offshore wind projects in the running, with a total capacity of up to 8.4 gigawatts, SSE owns or co-owns four, accounting for up to 5.1 gigawatts.
True, the returns on offer will not be as great as those for early projects such as Beatrice, but the sector has consistently over-delivered in cost-reduction. It is also unlikely that SSE alone could afford its multibillion-pound share of construction costs for multiple projects (three of which are co-owned by Equinor, of Norway). However, there should be no shortage of potential buyers: Royal Dutch Shell, say, has made no secret of its interest in UK offshore wind. Offshore wind is a compelling growth option for SSE — and one that has been largely out of focus for its investors in recent months, amid a catalogue of woes elsewhere in the group that led to three profit warnings over the past year.
SSE, formerly known as Scottish and Southern Energy, employs about 20,000 people in Britain. It has a retail division supplying gas and electricity to four million households, which it is struggling to offload after the debacle of a failed merger attempt with Npower and under pressure from intense competition.
SSE would rather focus on renewables and on its regulated networks business running electricity cables, although this, too, is under pressure from Labour’s renationalisation threat and Ofgem slashing returns. Adding to the mix, SSE management credibility has taken a huge knock after incurring an inexplicably large £400 million trading loss by shorting gas prices.
Tempus downgraded SSE to “sell” in February, when the shares were trading at a penny over £12. They have fallen further since and briefly last week could be bought for less than £10, lows not seen this decade.
Labour’s threats are not going away soon and a disposal of the retail business may not be swift — but these concerns appear to be largely priced in, while the material growth prospects in offshore wind do not. With next year’s reduced dividend of 80p giving a near-8 per cent yield, now looks like an opportunity to buy.
ADVICE Buy
WHY Offshore prospects could put the wind back in SSE’s sails after a torrid year
Fevertree Drinks
Given the extraordinary success of Fevertree Drinks since it became a public company in 2014, it’s easy to forget that bumpy markets almost derailed its plans, forcing it to cut its market value from about £200 million to £154 million to get the listing away (Dominic Walsh writes). By September last year, the shares, floated at 134p, had soared to £38.63, equating to a value of just under £4.5 billion.
Inevitably, some of the fizz has gone out of the mixer group’s shares of late amid concerns that its key British market could be reaching maturity, while questions are being asked about the longevity of the posh gin and tonic trend in some of the biggest of its 70-odd markets worldwide. The shares have fallen back more than £10 from their peak, closing down a further 83p, or 3 per cent, at £26.38 last night.
Such a stratospheric share price performance was always going to cause jitters eventually, yet in trading terms the company has done nothing and said nothing to cause concern. OK, so its annual meeting statement last week predicted that full-year results would be only in line with the board’s expectations, rather than ahead of them as usual, but it is still light years away from any kind of downgrade.
Tim Warrillow, its co-founder and chief executive, and his colleagues are not sitting on their hands, either. In America, which has huge potential, it has set up its own, wholly owned operations. It has introduced successful new products such as cucumber tonic, citrus tonic and, most recently, its own line of ready-to-drink G&Ts — an extra growth lever in the more mature UK market.
It also has developed a range of mixers to go with dark spirits such as whisky, cognac and rum, which could be key as it seeks to tap into the Chinese market, although Mr Warrillow, 44, is keeping a lid on expectations as the brand is seeded into top-end hotels and bars. The growing younger middle classes represent a huge opportunity, but, as other western consumer goods companies have found, finding the right route to success can be a long and tricky journey.
ADVICE Hold
WHY The sponsor of next month’s Fevertree Championships at Queen’s Club has all the shots
