UBS Raises SSE's Rating on Growth Prospects and Solid Foundations

UBS Upgrades SSE to 'Buy' Rating

Analysts at UBS Global Research have recently upgraded the stock rating of SSE plc to "buy" from "neutral." This decision reflects improving fundamentals and the potential growth within its transmission business, indicating positive changes ahead for the company.

Key Factors Driving the Upgrade

Several key factors contributed to this upgrade, highlighting SSE's relative valuation advantage. The analysts emphasized a shift in SSE's business model towards low-risk investments, which enhances its stability and attractiveness in the market.

Challenges Faced by SSE

Despite the upbeat outlook, SSE has faced its share of challenges. The company’s shares have experienced a decline of approximately 13% in 2024, primarily due to rising interest rates and delays in the Dogger Bank offshore wind project. This decline saw SSE trailing its competitors, such as Iberdrola and Enel, by 28% and 18%, respectively.

Strengthening Fundamentals

Regardless of these setbacks, UBS points out that SSE's fundamentals are showing signs of strength. The company is concentrating on regulated transmission capital expenditure and quasi-regulated Contracts for Difference. This strategy effectively minimizes exposure to riskier operations, positioning SSE for a safer investment.

Price Target Adjustment

Reflecting anticipated improvements, UBS has raised its price target for SSE from 1,935p to 1,970p. This adjustment takes into account expected higher capacity payments in the late 2020s, indicating a positive trajectory for the company's stock price.

Transmission Segment Contributions

Analysts note that most of SSE's capital expenditures are aimed at enhancing its transmission segment. Even with regulatory adjustments and planning constraints, UBS estimates that this segment has the potential to increase the company's earnings per share significantly from fiscal years 2025 to 2031.

Financial Strategy Without Asset Sales

Another plus for SSE is its ability to sustain an annual capital expenditure of about £5 billion. This can be achieved without resorting to selling assets or issuing new equity, providing a sense of financial security to investors.

Berwick Bank Offshore Wind Project

One exciting development is the Berwick Bank offshore wind project. Viewed as key in meeting the UK government's ambitious offshore wind goals, UBS estimates this project could add substantial value to SSE, with a potential increase of 200-300p per share upon planning approval.

Impact of Dogger Bank Delays

UBS has also downplayed the financial implications of delays in the Dogger Bank project, insisting that the overall contribution to SSE's earnings remains effective, despite the setbacks encountered.

Potential of Thermal Generation Assets

SSE's thermal generation assets are identified as a potential upside. While these assets are currently not performing at their peak, they may rebound thanks to tighter capacity markets and expected improvements in spark spreads.

Positioning for Clean Energy Transition

This resurgence in thermal assets, combined with SSE's expanding renewable portfolio, positions the company favorably to tap into the transition towards clean energy, appealing to environmentally conscious investors.

Valuation Comparison

From a valuation standpoint, SSE is trading at an enterprise value-to-EBITDA multiple of 9.2x for FY2026E, which is relatively attractive compared to peers like National Grid, trading at 10.8x. This suggests SSE offers a compelling investment opportunity.

Dividend Yield and Growth Prospects

Though SSE has a modest dividend yield of 3.2%, UBS believes the combination of growth potential and a strong balance sheet presents a strong case for investment, making SSE a favorable option in the energy sector.

Frequently Asked Questions

What prompted UBS to upgrade SSE's rating?

UBS upgraded SSE's rating due to improving fundamentals and expected growth in its transmission business.

What challenges has SSE faced recently?

SSE has faced challenges like rising interest rates and delays in the Dogger Bank offshore wind project, leading to a decline in stock performance.

How much has UBS raised its price target for SSE?

UBS has raised its price target for SSE from 1,935p to 1,970p, reflecting positive outlooks for capacity payments.

What are the potential benefits of the Berwick Bank project?

The Berwick Bank offshore wind project could significantly add value to SSE, with estimates of increases of 200-300p per share pending approval.

How does SSE's current valuation compare with its peers?

SSE is valued at an enterprise value-to-EBITDA multiple of 9.2x for FY2026E, which is lower than peers like National Grid at 10.8x, suggesting stronger investment appeal.

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