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The UK’s second largest electricity and gas supplier is facing big questions
Thursday 21 Feb 2019 Author: Steven Frazer

Investors in UK energy business SSE (SSE) face a nervous few weeks as they await details on future strategy that is widely expected alongside a trading update on 28 March.

The group is trying to sidestep a consumer supply market beset by political and competitive challenges.

SSE’s original plan was to merge its consumer energy business – which supplies 5.88m homes – with Npower, spinning the combined business out into a separate unit and allowing the core business to concentrate on regulated electricity generation and renewable energy operations.

The plug was pulled on that plan in December thanks to a combination of vicious competition, volatile wholesale prices and UK price caps.

SSE has seen a rapid decline in domestic energy customer accounts in recent years as it has become very easy for consumers to switch providers. According to Ofgem data, SSE has seen its UK domestic market share decline from 20% in 2010 to 13% as of December 2018.

SSE now plans to demerge the business as a separately-listed company on the UK stock market or sell it.

If neither of those plans come to anything SSE could retain the consumer supply business as a separate, ring-fenced business unit within the group, although this remains very much a fall-back option.

Earlier this month (8 February) SSE issued its second profit warning in four months thanks to the removal of government subsidies as part of the GB Capacity Market Scheme. That programme awarded payments to energy suppliers who provided extra capacity during periods of peak demand.

The company had previously warned that the introduction of January’s energy tariff price caps would slash operating profit margins at its retail arm from 6.8% in the year to 31 March 2018 to a range of 2% to 3% in the current financial year, and then fall further in subsequent years.

This has created huge concern over what has been one of the chief reasons to own the shares – reliable dividends.

SSE has reiterated its intention to pay a 97.5p per share dividend for this full year, implying an 8.1% income yield based on the current £12.06 share price.

This is despite the company confirming earnings per share in the 64p to 69p range – much lower than the dividend payment.

Analysts have already anticipated lower dividends in the future, with 80p per share expected for the 12 months to 31 March 2020, according to consensus forecasts.

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