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SSE Investment Proposal

Slide 1

November 2013

SSE
UK Energy Market

Investment
Thesis

Inflation &
Politics

Market
Ana...
SSE Investment Proposal

Slide 2

November 2013

SSE
• Integrated energy firm
– Retail (c. 25% of revenue)
– Transmission ...
SSE Investment Proposal

Slide 3

November 2013

Investment Thesis
• Impact of retail price freeze is overestimated
– Ener...
SSE Investment Proposal

Slide 4

November 2013

Inflationary impact

Source: BBC

Investment
Thesis

Inflation &
Politics...
SSE Investment Proposal

Slide 5

November 2013

Inflationary impact
CPI inflation

Energy's contribution to CPI inflation...
SSE Investment Proposal

Slide 6

November 2013

Political Situation

Investment
Thesis

Inflation &
Politics

Market
Anal...
SSE Investment Proposal

Slide 7

November 2013

Political Situation
Labour (Ed Miliband)
• Price freeze (20 months)
• Ene...
SSE Investment Proposal

Slide 8

November 2013

Political Situation
Labour

Conservatives

UKIP

Liberal Democrats

Inves...
SSE Investment Proposal

Slide 9

November 2013

Market analysis
5%
contribution
from
government
schemes

8%
price
rise

3...
SSE Investment Proposal

Slide 10

November 2013

Market analysis
UK Natural Gas Prices
80
75
70
65

Pence
per 60
therm
55...
SSE Investment Proposal

Slide 11

November 2013

UK Energy Market
UK Energy Supply Market Share (2009)

Others, 19%

Scot...
SSE Investment Proposal

Slide 12

November 2013

UK Energy Market
UK revenues as a percentage of company totals
100%

97....
SSE Investment Proposal

Slide 13

November 2013

UK Energy Market
Market capitalisation ($bn)
80

74.2

70

63.6

60
50
4...
SSE Investment Proposal

Slide 14

November 2013

UK Energy Market
P/E ratios (2012)
30

28.09

25
20

16.67
14.14

15
10....
SSE Investment Proposal

Slide 15

November 2013

Share Performance

Source: Yahoo Finance (4/11/13)

Investment
Thesis

I...
SSE Investment Proposal

Slide 16

November 2013

Share Performance

Price freeze proposed

Source: Yahoo Finance (1/11/13...
SSE Investment Proposal

Slide 17

November 2013

Financial Analysis (DCF)
Probable case

Worst case

Price freeze impleme...
SSE Investment Proposal

Slide 18

November 2013

Financial Analysis
Analyst's Target Prices
£21
£20

£19.33

£19
£18

£17...
SSE Investment Proposal

Slide 19

November 2013

Risks
DISCOUNT RATE (WACC)
£
19

C
A
S
H
F
L
O
W

3.0%

3.5%

4.0%

Actu...
SSE Investment Proposal

Slide 20

November 2013

Risks
DISCOUNT RATE (WACC)
3.0%

C
O
S
T
R
I
S
E
S

3.5%

4.0%

Actual
(...
SSE Investment Proposal

Slide 21

November 2013

Risks
Risk
Discount rate rises

Why it won’t be realised
• MPC forward g...
SSE Investment Proposal

Slide 22

November 2013

Proposal
• Buy SSE stock
– Target price of £18.50
– Time horizon: sale b...
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SSE investment presentation

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SSE investment presentation

  1. 1. SSE Investment Proposal Slide 1 November 2013 SSE UK Energy Market Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  2. 2. SSE Investment Proposal Slide 2 November 2013 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 Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  3. 3. SSE Investment Proposal Slide 3 November 2013 Investment Thesis • 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 Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  4. 4. SSE Investment Proposal Slide 4 November 2013 Inflationary impact Source: BBC Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  5. 5. SSE Investment Proposal Slide 5 November 2013 Inflationary impact CPI inflation Energy's contribution to CPI inflation 6 5 4 3 2 1 0 -1 Jan 2011 Jan 2012 Jan 2013 Source: Inflation Report, August 2013 Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  6. 6. SSE Investment Proposal Slide 6 November 2013 Political Situation Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  7. 7. SSE Investment Proposal Slide 7 November 2013 Political Situation Labour (Ed Miliband) • Price freeze (20 months) • Energy levies? Conservatives (David Cameron) • Reduce energy levy rises by 50% • Upside risk Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  8. 8. SSE Investment Proposal Slide 8 November 2013 Political Situation Labour Conservatives UKIP Liberal Democrats Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  9. 9. SSE Investment Proposal Slide 9 November 2013 Market analysis 5% contribution from government schemes 8% price rise 3% contribution from wholesale energy prices Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  10. 10. SSE Investment Proposal Slide 10 November 2013 Market analysis UK Natural Gas Prices 80 75 70 65 Pence per 60 therm 55 50 45 40 Jan-11 Investment Thesis Jan-12 Inflation & Politics Jan-13 Market Analysis Jan-14 UK Energy Market Jan-15 SSE Jan-16 Proposal
  11. 11. SSE Investment Proposal Slide 11 November 2013 UK Energy Market UK Energy Supply Market Share (2009) Others, 19% Scottish Power, 10% British Gas, 18% E.On, 18% EDF, 10% npower, 12% SSE, 13% Source: Nigel Tebbutt (Agiliti) Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  12. 12. SSE Investment Proposal Slide 12 November 2013 UK Energy Market UK revenues as a percentage of company totals 100% 97.94% 80% 71% 60% 40% 28% 18% 20% 15% 8% 0% SSE Investment Thesis Centrica (British Gas) Inflation & Politics IBERDROLA (Scottish Power) Market Analysis RWE (npower) EDF E.On UK Energy Market SSE Proposal
  13. 13. SSE Investment Proposal Slide 13 November 2013 UK Energy Market Market capitalisation ($bn) 80 74.2 70 63.6 60 50 40 30 29.4 21.0 22.5 RWE (npower) SSE 32.9 20 10 0 Centrica (British E.On AG (E.On) Gas) EDF IBERDROLA (Scottish Power) SSE Proposal Source: Hoovers Investment Thesis Inflation & Politics Market Analysis UK Energy Market
  14. 14. SSE Investment Proposal Slide 14 November 2013 UK Energy Market P/E ratios (2012) 30 28.09 25 20 16.67 14.14 15 10.74 IBERDROLA (Scottish Power) 10 9.80 E.On AG (E.On) 14.56 5 0 EDF RWE (npower) Centrica (British Gas) SSE Source: Hoovers Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  15. 15. SSE Investment Proposal Slide 15 November 2013 Share Performance Source: Yahoo Finance (4/11/13) Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  16. 16. SSE Investment Proposal Slide 16 November 2013 Share Performance Price freeze proposed Source: Yahoo Finance (1/11/13) Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  17. 17. SSE Investment Proposal Slide 17 November 2013 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 Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  18. 18. SSE Investment Proposal Slide 18 November 2013 Financial Analysis Analyst's Target Prices £21 £20 £19.33 £19 £18 £17.00 £17 £16.00 £16 £13.95 £14 £12 Merrill Lynch HSBC £14.75 £15 £13 £16.10 £12.56 £14.00 £12.70 £12.00 £11 JPMorgan Investment Thesis Worst case Citigroup Current Deutsche Investec price Bank Inflation & Politics Market Analysis UK Energy Market SSE Credit Suisse Probable case Proposal
  19. 19. SSE Investment Proposal Slide 19 November 2013 Risks DISCOUNT RATE (WACC) £ 19 C A S H F L O W 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 N/A £ 88.32 £ 39.48 £ 27.37 £ 23.22 £ 15.09 £ 10.22 3.25% ↑ 3% N/A £ 184.15 £ 55.15 £ 35.45 £ 29.37 £ 18.32 £ 12.20 3.5% N/A £ 86.49 £ 48.40 £ 38.59 £ 22.63 £ 14.66 Investment Thesis Inflation & Politics N/A Market Analysis UK Energy Market SSE Proposal
  20. 20. SSE Investment Proposal Slide 20 November 2013 Risks DISCOUNT RATE (WACC) 3.0% C O S T R I S E S 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 Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  21. 21. SSE Investment Proposal Slide 21 November 2013 Risks Risk Discount rate rises Why it won’t be realised • 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 Inflation & Politics Market Analysis UK Energy Market SSE Proposal
  22. 22. SSE Investment Proposal Slide 22 November 2013 Proposal • Buy SSE stock – Target price of £18.50 – Time horizon: sale before May 2015 • No hedging Investment Thesis Inflation & Politics Market Analysis UK Energy Market SSE Proposal

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