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Stock Watch: SSE and National Grid

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

The energy sector is in the spotlight this week and first up is SSE (SSE) with half-year results due out on Wednesday.

One of the Big Six energy suppliers, SSE has, like its competitors, come under increasing pressure as the number of new “challenger” brands has mushroomed in the past decade. The number of suppliers in the market has grown from 12 at the start of the decade to a peak of 70 last year, each one competing to attract customers on the promise of cheaper deals and better customer service.

A government-mandated cap on energy prices for 11 million households, which came into force in January, has also put large suppliers with high legacy cost bases under pressure.

SSE has been trying to find a solution for its domestic business, which supplies around 5.7 million homes in Britain, after a deal to spin it off and combine it with Npower, the UK retail unit of Germany’s Innogy, fell apart at the end of last year.  Instead, SSE wants to concentrate on the development of renewable energy projects and its regulated networks business.

That led to lengthy talks between SSE and Ovo over the sale of its UK energy supply business which was finally agreed in September. Ovo, SSE’s smaller rival, is to pay a headline price of £400 million in cash for SSE’s retail business in Britain. However, £59 million will be deducted to cover future payments associated with a UK back-up power scheme. Ovo will also issue a £100 million loan note to SSE that will be due for repayment in 2029, which after interest is added, will bring the total payable to £500 million.

The deal, which analysts have said has been agreed at “double what was previously expected” and compares with a book value of £764 million, should be completed by early 2020 and will surely come as a relief for SSE and its shareholders.

Since the deal has been struck there have been a flurry of broker revisions. HSBC has upgraded its investment rating on SSE to buy from hold and raised its price target from £12.70 to £14.80. UBS has repeated its neutral rating but raised its price target from £11.65 to £13. And Deutsche Bank remains a hold and has also raised its price target to £13.

On Thursday it’s the turn of National Grid (NG.) and I think it’s safe to say that it’s not every day that a company says it would be quite happy to give up an area of its business, that it’s been doing for the best part of three decades. 

National Grid has been responsible for matching electricity supply with demand and keeping Britain’s lights on since its privatisation in 1990, but its chief executive, John Pettigrew, told the Financial Times recently that National Grid would “absolutely consider” relinquishing its role managing Britain’s electricity system to an independent body, if policymakers decided it was the “right thing to do”. 

That was after facing questions about its management of the UK’s electricity supply following a blackout in August that disrupted more than a million homes and businesses in England and Wales

Analysts had already suggested that the FTSE 100 company’s investors would probably be happy to see the back of National Grid’s electricity system operator role; arguing that from an investor point of view, the electricity system operating part of the company is financially irrelevant and has little financial upside. Yet at the same time comes with reputational downside, such as the knock-on effect of the August the 9th blackout. 

However, more immediately it might want to address the departure this week of the head of its US business, Dean Seavers, who announced just days ago that he was standing down with immediate effect for personal reasons.

He is staying with the business until the end of December to ensure a smooth leadership transition and handover and has been temporarily replaced by Badar Khan, who has up until now been director of corporate development and National Grid Ventures.

Mr Seavers’ sudden departure comes at a time when the company’s focus is firmly on growing its US business. At a recent investor ‘teach in’ it said it expected to achieve asset growth of 8% over the medium term at its US business, but said that investment in the US energy industry’s ageing networks was necessary and would  ultimately create value for customers and shareholders. Of which its investors will, no doubt, want to hear more about when National Grid sets out its plans for the second half of the year under review.

Just ahead of Mr Seavers’ departure, broker Deutsche repeated its buy rating and raised its price target from 890 to 930 pence. The shares are currently trading around 886 pence.

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