SSE PLC's (LSE:SSE) plan to invest £33 billion in upgrading Britain’s electricity network has energised investors and analysts, despite the dilution from issuing shares to raise £2 billion.
Analysts at Jefferies said the new plan is "a clear positive", bringing "clarity on the balance sheet and the company’s growth outlook". UBS also hailed the "visibility" provided by the update.
The £2 billion equity raise "shouldn’t surprise", said Jefferies, and is "towards the lower-end" of mooted scenarios, with the majority of the £33 billion investment to be mostly funded by existing cashflows (£21 billion) and debt or hybrid finance (£14 billion).
UBS said the £33 billion, of which £30 billion is already committed, is higher than the £24.5 billion it expected over the same period, "mainly due to higher growth in transmission and an implicit assumption that seven transmission projects will get prompt planning consent".
The vast majority of the difference is the increased ASTI capital expenditure in transmission, which has been written into licenses by regulator Ofgem and where the staffing in the Scottish government has been increased threefold to help meet the 52-week period for overhead lines.
This investment is to fund 7-9% annual growth in adjusted basic EPS, post dilution, with no change to the dividend policy of 5-10% annual growth.
On valuation, UBS said its calculations, the thermal assets "come for free", the networks at around a 26% premium to the March 2027 regulated asset base and the renewable assets on 10x EV/EBITDA.
Using its current sum-of-the-parts valuation on the business through to 2031, this implies potential 16-17% annualised equity internal rate of return.
A dividend yield of around 2.6% compares to National Grid at around 3.2%.
Looking at the interim results, which were released alongside the strategy update, UBS noted that adjusted EBIT of £655 million was 3% below Refinitiv consensus, but adjusted EPS at 36.1p was 3% ahead of consensus on a like-for-like basis.
A fall in profits compared to last year was anticipated as a result of lower hedged prices and less favourable weather for SSE's wind farms.
Analysts at AJ Bell said SSE's new investment plans were "a considerable advance" on its previous plan to commit £17.5 billion by 2027.
"The promised growth alongside this spending is clearly helping the market warm to the deal, with the intention being to continue growing dividends too.
"The fact that a good portion of the £33 billion is being funded by cash flow from SSE’s existing assets lends credibility to the plan and to its pledge to keep increasing the payout."
Delivering the plan by the end of the decade "will be a challenge", the AJ Bell team said.