Is the SSE share price set to plunge below 1,000p again?
The SSE (LSE: SSE) share price keeps falling and there’s every chance it will plunge below 1,000p, down to treble figures again before the slide is over. The firm’s energy supply business is in flux and there’s nothing the stock market hates more than uncertainty.
Some of the uneasiness was removed on Wednesday with the news that the Competition and Markets Authority (CMA) had released its final report on the proposed merger of SSE’s household energy and services business in Britain with npower Ltd, which is Innogy SE’s retail energy business. The verdict is that the proposed merger doesn’t raise any competition concerns. It now looks almost certain that the deal will go through.
Difficult trading (as usual)
I bet SSE is glad to be getting shot of its retail arm. In September’s trading statement, the firm revealed it expects adjusted H1 operating profit to be around break-even in its retail business. Within that, the directors think SSE Energy Services will incur an adjusted operating loss. Not good, and an outcome that suggests why the firm is so keen to ditch its consumer-facing operations and retreat upline in the energy chain.
You only have to look at the number of energy suppliers online to see how fierce competition has become. On top of that, SSE listed in the report its customary long list of reasons that stopped it earning a fair living from the enterprise, blaming dry, still and warm weather, high gas prices, a higher cost of energy than expected, low output from renewable sources, lower volumes of energy being consumed, and a negative impact in relation to Energy Portfolio Management.
It feels like I read stuff like this in every financial report from energy suppliers these days. But, in this case, the outcome is that SSE’s adjusted operating profit for the first five months of the financial year will be around £190m lower than the directors planned for. To put that in perspective, last year’s operating profit came in around £1,947m, so it looks like the firm will be around 10% down for the year. That’s got to hurt, and will probably be another reason for a continuing slide in the share price.
Times could still be tough after the demerger
However, shedding its retail operation won’t help things as much as we might think. When the retail operation is gone, the firm will be around 20% smaller and will rely on its network and wholesale businesses to earn a crust. But the wholesale business — which has interests in upstream gas assets, wind farms and the like — is also forecast to show a “significant” reduction in adjusted operating profit in Generation and an adjusted operating loss “of around £100m” in Energy Portfolio Management. Gas Production is the one bright spot and looks set to increase its adjusted operating profit but, overall, the wholesale business looks set to deliver an adjusted operating loss – ouch!
Happily, the directors reckon the Networks business is “in line with plan,” and they think it’s on course to deliver a mid-single digit increase in adjusted operating profit for the first six months of the financial year, compared with the same period in 2017.
I think we need to see some positive growth figures in earnings, and the retail merger behind us, before this share will turn.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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