UK Edition
The timing of SSE’s first-half results could hardly have been better: the energy utility announced plans to treble its output from renewable sources by 2030 on the very day that the Prime Minister announced his 10-point green industrial revolution plan.
Whatever investors think of the finer points of this programme – and the failure of projects such as London’s Garden Bridge and the Thames Estuary Airport during the PM’s time as mayor of London does not breed great confidence – they may be tempted to follow Cantillon’s Law.
The 18th century economist asserted that those closest to the source of money would do best, and SSE’s existing renewables portfolio and growth plans could leave it well-placed, given the Government’s multi-billion-pound ambitions.
There is a danger that the programme attracts so much capital that the cost of new project tenders goes up and therefore margins and returns on investment go down. It is not hard to see the oil giants wading in at almost any price, given their determination – and need – to reinvent themselves.
Yet the markets do not seem unduly worried as they continue to eye the trend in the valuation of renewable assets, which remains firmly upward.
Investors need look no further than German utility RWE’s €400m (£356m) purchase in the summer of a 2.7 gigawatt pipeline of wind and solar assets from Nordex, a deal the buyer funded with a well-supported €2bn share placing.
It would take a braver investor than this column to stand in the way of such a tidal wave of cash, and SSE could well benefit from the ongoing reassessment of renewable asset prices, especially as it continues to make preparations for the world’s biggest offshore wind farm at Dogger Bank in the North Sea.
In the meantime, SSE continues to perform as expected. A 26pc drop in underlying first-half profits reflected the impact of the pandemic on both demand and costs, disposals will generate some cash and healthy gains, and the company is on track to increase last year’s 80p-a-share dividend in line with the retail price index, underpinning a forecast yield of 6pc.
That means shareholders can afford to sit and wait to see how the renewable plans laid down by the company and Government alike continue to develop. SSE appears to be in the right place at the right time and the yield remains attractive.
- Sign up to our Business Briefing newsletter for a snapshot of the day’s biggest business stories
- Read Questor’s rules of investment before you follow our tips
Questor says: hold
Ticker: SSE
Share price at close: £13.61
Update: Imperial Brands
The absence of any further profit warning, a dividend that meets (lowered) expectations and improved cash flow mean that Imperial Brands’ latest full-year results, released a week ago, offer hopes of better times ahead under Stefan Bomhard, the new chief executive, and a revamped management team, especially as debt is coming down.
Lower debt means lower risk, and lower risk can mean a higher valuation – and since Imperial trades on less than six times forecast earnings, this might help to combat the (understandable) view that the stock is no more than a value trap.
Sceptics will wonder whether the inflow from net working capital and the reduction in capital investment are both truly sustainable, given regulatory pressure against cigarettes, and now next-generation alternatives and the near-term threat posed by the pandemic’s impact on duty-free sales.
Nevertheless, cash flow did improve markedly and that gives greater confidence in the dividend. Even at its reduced level of 137.7p a share, the payment equates to a yield of 9.3pc. That might just buy the new boss some time to convince long-suffering shareholders that his strategic review, due in January, is capable of putting Imperial Brands back on track.
Dangers abound and ethical screens will filter out Imperial, but the yield will still tempt income seekers.
Questor says: hold
Ticker: IMB
Share price at close: £14.78
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.