SSE investment presentation

SSE

UK Energy Market

SSE Investment Proposal Slide 1 November 2013

Investment Thesis

Inflation & Politics

Market Analysis

UK Energy Market SSE Proposal

SSE

• Integrated energy firm– Retail (c. 25% of revenue)– Transmission & distribution (almost no revenue)– Generation & wholesale (c. 75% of revenue)

• By profit, retail has become most important• Listed on FTSE 100 (SSE.L)

Investment Thesis


Market Analysis



• Impact of retail price freeze is overestimated– Energy levies won’t increase as far– Wholesale gas prices likely to fall– Possible Conservative coalition or victory

• Hence, SSE is undervalued

Investment Thesis


Market Analysis


Investment ThesisSSE Investment Proposal Slide 3 November 2013

Source: BBC

Inflationary impact

Investment Thesis


Market Analysis



Jan 2011 Jan 2012 Jan 2013-1

0

1

2

3

4

5

6

CPI inflationEnergy's contribution to CPI inflation

Source: Inflation Report, August 2013

Inflationary impact

Investment Thesis


Market Analysis



Political Situation

Investment Thesis


Market Analysis



Political Situation

Labour (Ed Miliband)• Price freeze (20 months)• Energy levies?Conservatives (David Cameron)• Reduce energy levy rises by 50%• Upside risk

Investment Thesis


Market Analysis



Political Situation

Investment Thesis


Market Analysis



Labour

Conservatives

UKIP

Liberal Democrats

Market analysis

5% contribution from government

schemes

3% contribution from wholesale energy prices

8% price rise

Investment Thesis


Market Analysis



Market analysis

Jan-11

Apr-11Ju

l-11

Nov-11

Feb-12

Jun-12

Sep-12

Jan-13

Apr-13

Aug-13

Nov-13

Mar-

14

Jun-14

Sep-14

Jan-15

Apr-15

Aug-15

Nov-15

Mar-

16

Jun-16

Oct-16

40

45

50

55

60

65

70

75

80

UK Natural Gas Prices

Pence per

therm

Investment Thesis


Market Analysis



Source: Nigel Tebbutt (Agiliti)

UK Energy Market

Investment Thesis


Market Analysis


British Gas; 18%

E.On; 18%

SSE; 13%

npower; 12%

EDF; 10%

Scottish Power; 10%

Others; 19%

UK Energy Supply Market Share (2009)


SSE

Centri

ca (B

ritish

Gas)

IBERDROLA

(Sco

ttish Power)

RWE (

npower) EDF

E.On

0%

20%

40%

60%

80%

100% 98%

71%

28%18% 15%

8%

UK revenues as a percentage of company totals

UK Energy Market

Investment Thesis


Market Analysis



UK Energy Market

RWE (

npower) SSE

Centri

ca (B

ritish

Gas)

E.On AG (E

.On)

EDF

IBERDROLA

(Sco

ttish Power)

01020304050607080

21.0 22.529.4 32.9

63.674.2

Market capitalisation ($bn)

Source: Hoovers

Investment Thesis


Market Analysis



UK Energy Market

IBERDROLA

(Sco

ttish Power)

E.On AG (E

.On)

EDF

RWE (

npower)

Centri

ca (B

ritish

Gas) SSE

0

5

10

15

20

25

30

9.8 10.7414.14 14.56

16.67

28.09

P/E ratios (2012)

Source: Hoovers

Investment Thesis


Market Analysis



Share Performance

Source: Yahoo Finance (4/11/13)

Investment Thesis


Market Analysis



Share Performance

Source: Yahoo Finance (1/11/13)

Price freeze proposed

Investment Thesis


Market Analysis



Financial Analysis (DCF)

Probable case Worst case

Price freeze implemented from May 2015 to end of 2016

Revenues rise at historical average (in line with analyst expectations)

Gas prices fall 2% year-on-year Gas prices rise at historical average

Environmental policy requirements contribute 2.5 percentage points to

price rises

Environmental policy requirements continue to contribute 5 percentage

points to price rises

£19.33 £12.56

Investment Thesis


Market Analysis



Financial Analysis

Investment Thesis


Market Analysis


JPMorgan

Worst

case

Citigroup

Current p

rice

Deutsche Bank

Investec

Merrill L

ynchHSBC

Credit Suiss

e

Probable ca

se £11

£12

£13

£14

£15

£16

£17

£18

£19

£20

£21

£12.00 £12.56 £12.70

£13.95 £14.00 £14.75

£16.00 £16.10 £17.00

£19.33

Analyst's Target Prices


Risks

£ 19 3.0% 3.5% 4.0% Actual (4.3%) 4.5% 5.0% 5.5%

1.5% £ 25.06 £ 16.44 £ 11.28 £ 8.88 £ 7.85 £ 5.40 £ 3.57

1.75% £ 31.57 £ 19.87 £ 13.37 £ 10.47 £ 9.25 £ 6.39 £ 4.31

2% £ 41.34 £ 24.43 £ 15.98 £ 12.40 £ 10.92 £ 7.55 £ 5.15

2.25% £ 57.63 £ 30.82 £ 19.34 £ 14.79 £ 12.97 £ 8.92 £ 6.13

Actual (2.6%) £ 114.63 £ 45.73 £ 26.06 £ 19.33 £ 16.75 £ 11.32 £ 7.78

2.75% £ 187.91 £ 56.38 £ 30.08 £ 21.85 £ 18.83 £ 12.58 £ 8.61

3% N/A £ 88.32 £ 39.48 £ 27.37 £ 23.22 £ 15.09 £ 10.22

3.25% N/A £ 184.15 £ 55.15 £ 35.45 £ 29.37 £ 18.32 £ 12.20

3.5% N/A N/A £ 86.49 £ 48.40 £ 38.59 £ 22.63 £ 14.66

Investment Thesis


Market Analysis



DISCOUNT RATE (WACC)

CASH

FLOW

↑

Risks

3.0% 3.5% 4.0% Actual (4.3%) 4.5% 5.0% 5.5%

7.7% £ 182.63 £ 75.64 £ 45.08 £ 34.60 £ 30.62 £ 22.20 £ 16.68

7.8% £ 148.69 £ 60.71 £ 35.59 £ 26.97 £ 23.70 £ 16.77 £ 12.24

Actual (7.9%) £ 114.63 £ 45.73 £ 26.06 £ 19.33 £ 16.75 £ 11.32 £ 7.78

8.0% £ 80.43 £ 30.69 £ 16.49 £ 16.49 £ 9.77 £ 5.86 £ 3.30

8.1% £ 46.11 £ 15.60 £ 6.89 £ 6.89 £ 2.77 £ 0.37 -£ 1.20

8.2% £ 11.67 £ 0.45 -£ 2.75 -£ 2.75 -£ 4.26 -£ 5.13 -£ 5.71

Investment Thesis


Market Analysis



DISCOUNT RATE (WACC)

COST

RISES

Risks

Risk Why it won’t be realised

Discount rate rises • MPC forward guidance• MPC July statement against yield rises

Gas prices don’t fall • Only matters during price freeze window

Politics • Pressure of Cameron’s energy levy policy• Cameron has rebuffed windfall tax idea

Blackouts • California: faulty market design, capacity, regulatory inaction & market manipulation

Investment Thesis


Market Analysis



Proposal

• Buy SSE stock– Target price of £18.50– Time horizon: sale before May 2015

• No hedging

Investment Thesis


Market Analysis



SSE investment presentation

Business

Transcript of SSE investment presentation