Navigating SSE's Earnings Crossroads: Can Renewables and Regulation Steer a Path to 200 Pence?

SSE PLC's narrowed FY25 earnings guidance has sparked debate among investors about whether the company can sustain its trajectory toward its long-term EPS target of 175–200 pence by FY2027. With the stock trading near 1,653p—just above the Bloomberg consensus estimate of 159.8p—the question is whether the slight recalibration of FY25 expectations signals a permanent constraint on growth or a temporary adjustment to external headwinds. The answer hinges on three factors: the resilience of its renewables segment, the stability of its regulated networks, and the prudence of its capital allocation strategy.

The Narrowed Guidance: A Course Correction, Not a Detour

SSE's FY25 guidance now stands at 155–160p, down slightly from its earlier 154–163p range. While the midpoint dipped to 157.5p, management emphasized that the long-term 2027 target remains intact. This recalibration reflects two immediate challenges: weather-related underperformance in renewables and project delays in Southern Europe. For instance, the final months of FY25 saw reduced wind speeds in key markets, trimming renewables output despite a 17% annualized capacity-driven increase. Meanwhile, planning hurdles in Spain and Italy delayed progress on solar and storage projects, shaving profitability in thermal generation.

Yet, the company's regulated networks—accounting for over half of its profits—provided a critical anchor. Their 53% operating profit growth underscores the stability of this segment, which benefits from regulated returns and long-term contracts. This resilience suggests SSE's earnings are not solely at the mercy of volatile renewables output.

Renewables Volatility: A Manageable Risk or a Structural Headwind?

Renewables remain SSE's growth engine, but their earnings contribution depends on two variables: weather and project execution. While capacity expansions have boosted output, variable weather—particularly in the final quarter—highlighted the segment's cyclical nature. However, SSE's strategy to diversify geographically and technologically (e.g., offshore wind vs. solar) should mitigate regional weather risks over time.

The company's heightened hurdle rate of over 12% for offshore wind projects reflects its focus on capital discipline. This shift, driven by macroeconomic uncertainty, ensures only the most robust projects advance—a prudent move given the cost pressures in the sector.

Capital Allocation and the Dividend: A Balancing Act

SSE's £3 billion annual capex plan under its NZAP Plus strategy aims to accelerate renewables and grid investments. Despite the high spending, the company has maintained a conservative balance sheet: net debt is expected to stay at £10 billion, with a net debt-to-EBITDA ratio of 4x by 2027. This financial fortitude supports its 7% dividend hike, which now yields 4.8% at current prices.

The dividend's sustainability hinges on whether EPS can grow steadily toward the upper end of the 2027 target. The consensus view—159.8p for FY25—rests at the high end of the revised guidance, suggesting analysts are pricing in a rebound.

Regulatory Risks and Strategic Confidence

SSE faces potential headwinds from regulatory changes, such as zonal pricing in the UK energy market, which could pressure profits in certain regions. However, management expressed confidence that grandfathering of Contracts for Difference (CFDs) and its diversified portfolio would insulate the business. The progress at Dogger Bank—now 58% complete—also signals execution capability, a critical factor for investors.

Valuation and Investment Thesis

At 1,653p, SSE's stock trades at roughly 10x the consensus FY25 EPS estimate. If the company can achieve its 200p target by FY2027, the current valuation offers significant upside. However, risks such as further renewables underperformance or regulatory delays could cap gains.

Investors must weigh two scenarios:
1. Base Case: SSE meets the mid-point of its FY27 target (187.5p). At current prices, this implies a ~14% total return from FY25 to FY27, including dividends.
2. Upside Case: Achieving 200p by FY27 would push the stock to ~2,000p, a 21% gain.

Investment Recommendation

SSE's stock appears fairly valued at current levels, given the consensus expectations. While the narrowed FY25 guidance reduces short-term upside, the long-term trajectory remains compelling for income-focused investors, especially with the 4.8% dividend yield. However, those seeking growth should wait for clearer signs that renewables volatility has peaked and that project delays are resolved.

In short, SSE's strategy is sound, but execution will determine whether the stock becomes a buy or a hold. For now, it's a stock to own for its defensive regulated assets and dividend, with upside potential tied to renewables' resilience.