UBS upgrades SSE to 'buy' on stronger fundamentals, growth in transmission

Investing.com -- Analysts at UBS Global Research have upgraded SSE (LON:SSE ) plc's stock rating to "buy" from "neutral,” reflecting improving fundamentals and potential growth in its transmission business. 

UBS flags several key factors driving this decision, emphasizing the relative valuation advantage and the shift in SSE's business model towards low-risk investments.

As a result of rising interest rates and delays in the Dogger Bank offshore wind project, SSE's shares declined by around 13% in 2024. 

Due to this underperformance, SSE lagged behind peers such as Iberdrola (OTC:IBDRY ) and Enel (BIT:ENEI ) by 28% and 18%, respectively. 

Despite these challenges, UBS points out that the company's fundamentals are strengthening. 

SSE is increasingly focusing on regulated transmission capital expenditure and quasi-regulated Contracts for Difference, minimizing its exposure to riskier merchant operations. 

UBS has accordingly raised its price target for SSE to 1,970p from 1,935p, reflecting anticipated higher capacity payments in the late 2020s.

SSE's capital expenditures are attributed to its transmission segment, according to analysts. 

UBS estimates that even with potential reductions in planned expenditure due to regulatory and planning constraints, the transmission business could add 46p to the company's earnings per share between fiscal years 2025 and 2031. 

The analysts also flag SSE's capacity to sustain an annual capital expenditure of approximately £5 billion without needing to sell assets or issue new equity.

Another development is the Berwick Bank offshore wind project, which UBS views as crucial for meeting the UK government's ambitious offshore wind targets. 

The project, pending planning approval, has the potential to add value to SSE, with UBS estimating an accretion of 200-300p per share. 

The analysts further downplay the financial impact of delays at the Dogger Bank project, noting that its overall contribution to earnings remains intact despite setbacks.

UBS also identifies SSE's thermal generation assets as an upside option. While these assets are currently at a low point in profitability, they could see a rebound due to tighter capacity markets and anticipated improvements in spark spreads. 

This segment, coupled with SSE's growing renewable portfolio, positions the company well to benefit from the transition to clean energy.

In terms of valuation, SSE trades at an enterprise value-to-EBITDA multiple of 9.2x for FY2026E, which is seen as attractive relative to peers like National Grid (LON:NG ), valued at 10.8x. 

Despite a modest dividend yield of 3.2%, UBS says that the growth potential and the strong balance sheet are strong points in SSE's favor.

Source: Investing.com