Questor: break-up or not, SSE can keep powering returns and offers a healthy yield

Low-carbon and renewable energy provider SSE is politely batting back press speculation about a break-up of the company that continues to bubble after stakebuilding by activist investor Elliott Management.

Shareholders will have to wait until November’s first-half results for further comment, but whether a break-up is on the cards or not, SSE still appears to offer the right combination of yield and potential for capital gain.

SSE’s sale of its retail energy supply business to Ovo for £500m last year looks shrewd considering the chaos in that market and August’s disposal of its one-third stake in gas distribution business SGN for £1.2bn fine-tuned the portfolio.

The FTSE 100 firm’s regulated power transmission and distribution operations and renewable energy generation assets, in the form of wind farms and hydroelectric plants, mean it is well positioned to help the UK in its drive towards a net-zero economy (and keep the lights on).

The utility’s plans to treble energy output from renewables by 2030 and invest heavily in smart energy grids may be catching Elliott’s eye, especially as SSE uses a partnership model when it develops assets.

This helps to de-risk the investment and potentially increase financial return, as could be seen with the sale of stakes in the Seagreen and Dogger Bank wind farms.

Whether Elliott is pressing for a renewables spin-off, and whether management accedes or not, will only become clear over time. But this debate highlights the value that SSE could offer and therefore the potential for further share price gains to supplement the 44pc rise already recorded since our initial analysis in October 2018.

In addition, the asset sales will keep down debt, funding both the required asset investment and supporting dividend payments.

SSE’s policy is to increase its payout in line with the Retail Price Index measure of inflation until 2023. We have already banked 258.5p in dividends to supplement the capital returns and a forecast yield that just exceeds 5pc should be more than enough to keep investors interested.

SSE looks more than capable of powering portfolio returns.

Questor says: hold

Ticker: SSE

Share price at close: £16.26 

Update: PZ Cussons

We are off to a sticky start since tipping soaps specialist PZ Cussons in June, as we are sitting on a 7pc loss after last week’s full-year results.

However, the FTSE 250 firm has just delivered its first sales and earnings growth in several years, while chief executive Jonathan Myers and the board felt sufficiently confident to raise the final dividend and declare that the company was on track to meet earnings forecasts for the year that has just begun. Patience will be required but it feels like the long-awaited turnaround is under way.

It is easy to understand why the figures, and an accompanying first-quarter trading update, did not please everyone. Sales in the first three months of the new fiscal year fell by 9pc against the equivalent period 12 months ago, thanks to a drop in hygiene revenues.

In addition, the reaffirmed earnings guidance did come with the caveat that there would need to be no further cost headwinds or supply chain disruption. Analysts trimmed their earnings forecasts for the year to May 2022 by a low single-digit percentage, but the much deeper share price slide that followed publication of the results looked overdone all the same.

Sales were up 13pc on the first quarter of two years ago and the top line began to grow again on a year-on-year basis at the end of the opening three-month period. And while input cost inflation is running at around 10pc, as raw materials and logistics become more expensive, price increases and cost savings should help to protect margins.

A further drop in net debt means the balance sheet is strong and leaves PZ Cussons with plenty of scope for investment in its key brands, such as Carex, Imperial Leather and Morning Fresh. In summary, while near-term trading may be volatile the long-term turnaround still looks to be progressing nicely.

We can stick with PZ Cussons (and some may even want to buy on weakness). 

Questor says: hold

Ticker: PZC

Share price at close: 228p

Russ Mould is investment director at AJ Bell, the stockbroker

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