SSE falls as npower merger is in jeopardy. Would I buy, or avoid, the FTSE 100 dividend stock?
The emergence of the cheap independent energy suppliers and their devastating impact on the traditional ‘Big Six’ suppliers has commanded acres of newsprint since around the turn of the last decade.
It’s a subject that we here at The Motley Fool have covered in no little detail. In an effort to rid itself of these problems, SSE (LSE: SSE) elected to take the bull by the horns and merge its SSE Energy Services division with fellow energy giant npower.
The essentialness of such a strategy was underlined in SSE’s July trading statement in which it advised that another 320,000 customers had escaped its clutches during the 12 months to June, driving its customer base down to 7.45m.
Whoops!
But news emerged after trading closed on Thursday that the upcoming introduction of the new price-cap by regulator Ofgem has thrown a gigantic spanner in the works. The FTSE 100 firm was last dealing 4% lower as a result.
In a market statement, SSE advised that it has been in fresh dialogue with npower owner Innogy SE regarding “potential changes to the commercial terms of the proposed combination… and listing of the new company on the Main Market of the London Stock Exchange.”
These talks will last for several weeks, SSE said, and will cause the completion of the merger to be pushed back beyond the first quarter of 2019. All work to complete the formation and listing of the new entity will carry on, the firm added, and an update on the status of the talks will be provided in the middle of December.
SSE has warned of such a potential problem coming down the tracks in mid-October when it said that Ofgem’s planned tariff cap, due for implementation on January 1 2019 “is expected to result in adjusted operating profit for SSE Energy Services in 2018/19 being significantly lower than SSE expected at the start of the financial year.”
The upcoming price ceiling is set to be introduced at £1,137 per year for customers on a standard variable tariff for electricity and gas. The regulator estimates that around 11m households are currently on one of these default deals, and that the cap will cut overcharging by energy suppliers by a colossal £1bn.
Is this REALLY catastrophic news?
To answer the above question in a word: unquestionably. It doesn’t mean that investors should reach for the cyanide. But if SSE can’t cut itself adrift of its sinking retail operations, then it really is in trouble, as the rapid and relentless slide in its customer base shows.
Irrespective of what the future holds for the fate of SSE Energy Services, though, the firm’s earnings outlook — as my fellow Fool Kevin Godbold recently noted – can hardly be considered as being in rosy shape, due to the profitability of its Wholesale division.
It’s no surprise that SSE is expected to endure a 32% earnings fall in the current year to March 2019, and who would rule out the business reporting further colossal drops after that? Not me, for one — the chances of such a scenario are exceptionally high, and particularly so after today’s news.
As a consequence, I’m happy to look past SSE’s low forward P/E multiple of 13.9 times, and its mammoth 8.5% dividend yield, and avoid it like the plague.
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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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