Potential energy tariff caps could weigh on SSE's performance, says HSBC
Analysts at HSBC have downgraded SSE, saying potential tariff caps enforced by the government could weigh on the energy supplier’s performance.
Electricity
10,017.40
11:34 24/04/24
FTSE 100
8,083.06
11:35 24/04/24
FTSE 350
4,442.41
11:35 24/04/24
FTSE All-Share
4,396.43
11:35 24/04/24
SSE
1,664.00p
11:35 24/04/24
The FTSE 100 utility was downgraded to ‘hold’ from ‘buy’ and its target price was slashed to 1,620p from 1,740p on a higher risk premium.
The bank believes that the political ‘noise’ surrounding energy prices is growing louder, as SSE and the other big six energy suppliers - bar Centrica - are set to hike prices. SSE is upping its prices for domestic customers from 1 April by 6.9%, or £73 per year.
In response, Prime Minister Theresa May said on 17 March that the government is considering how to “step in” to control energy prices because the market is “manifestly not working” for consumers and it will aim to “crack down” on businesses that “abuse the system”, according to the Telegraph.
HSBC modeled SSE’s earnings per share with a price cap which implied a circa 9% earnings per share erosion in 2018 and an increase in the dividend payout ratio to 94% from 85%.
It also found that in terms of credit ratios, SSE would remain within the stable A3 rating from credit rating agency Moody’s, even with a tariff cap and said that it is this, not the dividend cover that underpins the retail price index-linked dividend policy.
“Our major concern with recent developments is that the rating agencies will see any government intervention as an increase in the risk profile of the UK integrated electric utilities and increase the risk premium which may include higher key credit ratio requirements. The utilities could then face a cash constraint which might impede their ability to grow dividends,” HSBC said.
SSE’s recent third quarter trading statement reiterated its 2017 target of achieving adjusted earnings per share of at least 120p and updated its capital investment programme for 2016/17 financial year to be about £1.75bn.
HSBC said it was difficult to see how “any earnings upside will compensate for concerns about political risk or how the stock will outperform with the current levels of uncertainty”.