SSE shares fall as Jefferies downgrades to ‘hold’ by Investing.com

Investing.com — Shares of SSE (LON:) slipped after Jefferies downgraded the stock to a “hold” from a “buy.” The revised recommendation comes based on analysts’ updated risk-reward assessment following SSE’s latest trading update for the first half of fiscal 2025.

At 8:08am (1208 GMT), the SSE was trading 1.6% lower at £1,861.

However, Jefferies maintained its price target of 2,050p but indicated that the shares’ recent strong performance and current valuation leave limited room for upside.

Jefferies’ decision to downgrade reflects concerns about SSE’s near-term growth prospects despite its broad financial performance.

The renewable energy and power grid company has seen solid growth in its share price since February, and the stock now trades at 10 times FY26 estimated EV/EBITDA, a valuation that Jefferies considers “in line with peers.”

This high valuation, along with sector trends, have led analysts to conclude that the stock’s risk-reward profile is now more balanced. Given that the stock gained momentum earlier this year, the opportunity for significant further appreciation appears limited.

SSE’s trading update provided new details on the company’s expected earnings for the first half of fiscal 2025, including an EPS guidance of 45p, up 22% year-on-year.

This is in line with the company’s guidance, and Jefferies’ estimates for the period are in line with these forecasts.

“With this, we model 1H25 EBIT of £791m, +14% y-o-y, with 1H EPS up to 45p, +22% y-o-y,” the analysts said.

Key divisions such as Networks and Renewables are expected to post steady gains, with networks expected to contribute £456m to total EBIT and renewables to contribute £206m.

However, the thermal and gas storage division, while expected to generate more than £200m in EBIT for the full year, saw more modest gains in the first half, contributing just £40m pounds in total.

Despite these solid numbers, Jefferies expressed caution about SSE’s outlook beyond the current fiscal year.

However, a 15% cut in FY25 EBIT for SSE’s thermal and gas storage division reflects a more conservative stance, with Jefferies highlighting the company’s comments on a strong weighting in the second half of this segment.

Renewables, a critical growth driver for SSE, are expected to deliver stronger results, with Jefferies raising its FY25 EBIT forecast for the division by 1%.

Beyond the immediate financials, Jefferies also highlighted the execution risks surrounding SSE’s flagship offshore wind project, Dogger Bank. SSE has experienced delays in commissioning the Dogger Bank A phase of the wind farm, which could create a ripple effect on subsequent phases (B and C).

These delays have raised concerns about potential cost overruns and the project’s overall schedule, although SSE reiterated that project profits remain broadly in line with initial expectations.

However, Jefferies pointed out that the market may need more concrete progress in turbine installations before the inventory overhang caused by these execution risks can fully unwind.

With the stock currently trading at 10x FY26 EV/EBITDA and offering a dividend yield of 3.7% for FY26, Jefferies sees little room for further multiple expansion in the near term. This dividend yield lags the broad sector average of around 5%, which may also temper investor enthusiasm.

Jefferies’ price target remains firm at 2,050p, implying a 12-month total shareholder return of around 11.5%.

The brokerage’s base case suggests SSE will trade on a P/E multiple of 12x FY26 and an EV/EBITDA ratio of 10.5x, assuming stable grid revenues and electricity prices.

The downside scenario sees a potential price drop to 1,600p driven by weaker than expected energy prices and weaker grid returns, while the upside scenario could see the stock reach 2,300p if energy prices and grid earnings exceed current forecasts.