November 12, 2009

Scottish & Southern Energy (Sell, TP=960.0p) - Half-year results - No major surprises in the interim release (3p)

Please find below our latest publication:

Scottish & Southern Energy (Sell, TP=960.0p) - Half-year results - No major surprises in the interim release (3p)

Scottish & Southern reported interim results (H1 09/10) close to our expectations: underlying pre-tax profit of £396m vs SGe £402m and adjusted operating profit of £579m vs SGe £523m. Note that all businesses contributed to growth with production/supply of electricity contributing £227m vs SGe £200m. The group reported net debt of £5.1bn and guided for full-year net debt of £5.5bn by year-end (March 2010).
We reiterate our full-year forecasts. The conference call on the results presentation did not provide any data to lead us to change our approach. We continue to believe that the group is overinvesting (with a five-year plan amounting to £6.7bn out to 2013) and £1.4bn projected for the current year. This policy could force the group to make a capital increase (an eventuality management has ruled out for the moment). Such a move would most definitely be required if the group opts to buy the network assets up for sale by EDF Energy (regulated asset value of £3.6bn)

Target price & rating
We reiterate our Sell rating on the share, as its main strengths are also likely to act as obstacles to any rerating: high net debt (3x 09/10e EBITDA), diversified contributions to operating profit (electricity, networks, telecoms, gas storage), large customer base (but likely increase in defaults on payment) and investment in electricity production (although, for some time, the group persisted in maintaining that it had an even spread between supply and production). We reiterate our 960p TP (see our 2 July 2009 report).

Next events & catalysts
SSE is continuing with its plans to build electricity generation facilities (wind and gas) which should come into service over the current year and subsequent years. EDF's regulated network assets are to be sold during H1 10. SSE should also start to consider construction of one or more nuclear power plants in the UK, as part of a consortium.

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