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SSE is 'potential takeover target' after renewables repositioning, says Goldman

Published: 15:39 07 Jan 2020 GMT

SSE PLC -

Energy company SSE PLC (LON:SSE) is a possible takeover target after repositioning itself for future growth in a climate-change world, but Goldman Sachs no longer thinks the shares are worth buying.

The US investment bank downgraded the former Scottish and Southern Energy to a ‘neutral’ rating from ‘buy’, though lifted its target price to 1,461p from 1,369p on Tuesday, with the shares having delivered a total return of 49% over the past 12 months. 

READ: Centrica, SSE, National Grid dividends to be capped by regulator

Last year, Goldman felt there was “a major step-up in public awareness” of climate change issues and more countries outlining net zero policies, including the UK's net zero target by 2050. 

“These are likely to provide 30 years of growth and regulatory stability in climate infrastructure, with most of the growth concentrated in renewable activities,” analysts wrote in a note to clients.

SSE shares re-rated last year as it de-risked its business model via disposals and a shift towards renewables and networks, with “sizeable” renewable auction wins secured over 2019.

“Industry consolidation could provide upside, but we see better risk/reward elsewhere,” the analysts said. 

Having said that, the strong visibility on capital allocation and the growing importance of scale in the industry, means the analysts expect consolidation to drive M&A between the relatively fragmented global renewables market. 

“We believe that SSE stands out as a possible target were we to see M&A in the sector owing to a favourable combination of high earnings exposure to low-risk, infrastructure activities (RES, grids) and its relatively small market cap.”

Goldman’s price target reflects a perceived fundamental valuation of 1,372p per share and a new “M&A valuation” of 1,671p. 

“Despite this change, we see more modest upside at the current share price (1% upside) post strong performance and hence downgrade the shares.”

SSE shares were down more than 1% to 1,423p on Tuesday afternoon.

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