Is SSE undervalued based on future cash flows and its price relative to the stock market?
Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current
share price of SSE to its discounted cash flow value.
The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.
How is this discounted cash flow calculated?
- The current share price of SSE is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
We assess SSE's value by looking at:
- Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) (Click here or on bar chart for details of DCF calculation.)
- Is the PE ratio less than the market average, and/ or less than the Utilities industry average (and greater than 0)? (2 checks)
- Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
- Is the PB ratio less than the Utilities industry average (and greater than 0)? (1 check)
SSE has a total score of 3/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (-27.91%).
Full details on the Value part of the Simply Wall St company analysis model.
Discounted cash flow (Free cash flow to Equity)
The calculations below outline how an intrinsic value for SSE is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.
5 year cash flow forecast
See our documentation to learn about this calculation.
|Levered FCF (GBP, Millions)
||Extrapolated @ (0.08%)
Discounted (@ 8.2%)
Present value of next 5 years cash flows:
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = £788 × (1 + 1.2%) ÷ (8.23% – 1.2%)
Terminal value based on the Perpetuity Method where growth (g) = 1.2%:
Present value of terminal value:
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
Value = Total value / Shares Outstanding (£10,675 / 999)
Value per share:
Current discount (share price of £14.13): -32%
Estimate of Discount Rate
The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.
Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
Discount rate = 8.23% = 1.17% + (0.8 * 8.83%)
Estimate of Bottom Up Beta
The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm).
Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))
0.596 = 0.404 (1 + (1- 21%) (60.1%))
Levered Beta used in calculation = 0.8
- The risk free rate of 1.17% is from the 10 year government bond rate in GB.
- The bottom-up beta is estimated by analysing other companies in the same industry.
- The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (10%) (source: Buffet).
- The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.
How is SSE expected to perform in the next 1 to 3 years based on estimates from 13 analysts?
The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.
Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Expected earnings growth over 3 years.
Future Earnings growth analysis
Is SSE expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.
Are SSE's annual earnings growth expected to exceed 1.8% over the next 3 years?
- Earnings are expected to decrease over the next year.
- Earnings are expected to decrease over the next 3 years.
1 & 3 year estimated growth in earnings
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Analysts growth expectations
2 year growth check
Which of the these is expected to increase by over 50% in 2 year's time?
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
- SSE is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.
Improvement & Relative to industry
- Expected to be above the Utilities industry average.
- A decline in SSE's performance (ROE) is expected over the next 3 years.
Future performance checks
We assess SSE's future performance by looking at:
- Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
- Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
- Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
SSE has a total score of 1/6, see the detailed checks below.
Note: If no +3 year data is available, +2.5 year data may be used.
Note 2: We use GAAP per Share in all our calculations.
Full details on the Future part of the Simply Wall St company analysis model.
How has SSE performed over the past 5 years?
The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare SSE's growth in the last year to its industry (Utilities).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
- SSE's earnings growth has exceeded the industry average over the past year.
- SSE's 1 year earnings growth exceeds its 5 year annual average (243.9% vs -8.2%).
- SSE has delivered strong earnings growth in the past 5 years.
SSE's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
- Strong return on shareholders funds (ROE) last year.
- SSE performed above the Utilities industry average based on return on assets (ROA) last year.
- Performance based on revenue producing assets (ROCE) has been diminishing over 3 years.
Past performance checks
We assess SSE's performance over the past 5 years by checking for:
- Has earnings per share (EPS) increased in past 5 years? (1 check)
- Has the EPS growth in the last year exceeded that of the Utilities industry? (1 check)
- Is the current EPS growth higher than the average annual growth over the past 5 years? (1 check)
- Is the Return on Equity (ROE) higher than 20%? (1 check)
- Is the Return on Assets (ROA) above industry average? (1 check)
- Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
SSE has a total score of 5/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations.
Full details on the Past part of the Simply Wall St company analysis model.
How is SSE's financial health and their level of debt?
A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).
The boxes below represent the relative size of what makes up SSE's finances.
The net worth of a company is the difference between its assets and liabilities.
- SSE is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
- SSE's long term commitments exceed its cash and other short term assets.
This treemap shows a more detailed breakdown of SSE's finances.
If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
- High level of stock/ inventory/ unsold assets.
- Total debt is not covered by total short term assets.
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.
The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.
If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
- The level of debt (135%) compared to net worth is high (greater 40%).
- The level of debt compared to net worth has been reduced over the past 5 years (141% vs 135% today).
- Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
- Interest on debt is well covered by earnings (7.5x coverage).
Financial health checks
We assess SSE's financial health by checking for:
Full details on the Health part of the Simply Wall St company analysis model.
- Are short term assets greater than short term liabilities? (1 check)
- Are short term assets greater than long term liabilities? (1 check)
- Has the debt to equity ratio increased in the past 5 years? (1 check)
- Is the debt to equity ratio over 40%? (1 check)
- Is the debt covered by short term assets? (1 check)
- Are earnings greater than 5x the interest on debt (if comapany pays interest at all)? (1 check)
SSE has a total score of 4/6, see the detailed checks below.
What is SSE's current dividend yield, its reliability and sustainability?
Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Current annual income from SSE dividends. Estimated to be 6.84% next year.
If you bought £2,000 of SSE shares you are expected to receive £129 in your first year as a dividend.
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account?
It is up there with the best dividend paying companies?
- Paying above low risk savings rate. (2.3%)
- Paying above the markets top dividend payers. (3.98%)
Historical dividend yield
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.
We also check to see if the dividend has increased in the past 10 years.
- Dividends per share have been stable in the past 10 years.
- Dividends per share have increased over the past 10 years.
Current Payout to shareholders
What portion of SSE's earnings are paid to the shareholders as a dividend.
- Dividends paid are well covered by net profit (2.2x coverage).
Future Payout to shareholders
- Dividends after 3 years are expected to be covered by net profit (1.3x coverage).
Income/ dividend checks
We assess SSE's dividend by checking for:
Full details on the Dividends part of the Simply Wall St company analysis model.
- Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
- Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
- Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
- If they have paid a dividend for 10 years has it increased in this time? (1 check)
- How sustainable is the dividend, can SSE afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
SSE has a total score of 6/6, see the detailed checks below.
What is the CEO of SSE's salary, the management and board of directors tenure and is there insider trading?
Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
Mr. Alistair Phillips-Davies has been Vice President of Eurelectric Aisbl since June 2015. Mr. Phillips-Davies has been the Chief Executive Officer of SSE plc since July 1, 2013. He leads the Executive Committee and the rest of the SSE team in the day-to-day running and operations of SSE and is responsible for implementing the strategy and policy set by the Board. He also has Board-level responsibility for Human Resources and Corporate Affairs. He served as Deputy Chief Executive of SSE plc since 2012. He served as Deputy Chief Executive of Retail and Wholesale Business at SSE plc (alternative name, Scottish & Southern Energy PLC) from September 2012 to July 1, 2013. He served as the Generation & Supply Director at SSE plc since December 2010 and served as its Member of Management Board. He served as Energy Supply Director at SSE plc since 2002. He joined Southern Electric in February 1997 having worked for HSBC and the National Westminster Bank in corporate finance and business development roles. He also served as Director of Energy Supply Operations at SSE plc and oversaw the introduction of the New Electricity Trading Arrangements. He serves as a Member of Eurelectric Aisbl. He has been an Executive Director of SSE plc since January 2002. He serves as the Chairman of the Risk Committee and has Board level responsibility for Energy Trading, Electricity and Gas Supply, Marketing and Energy Services. He has a degree in Natural Sciences and is a qualified Chartered Accountant.
- CEO's compensation has been consistent with company performance over the past year.
- CEO's compensation appears reasonable.
Management Team Tenure
Average tenure of the SSE management team:
- The average tenure for the SSE management team is over 5 years, this suggests they are a seasoned and experienced team.
CEO & Executive Director
Finance Director & Executive Director
Director of Investor Relations & Company Secretary
Managing Director of Retail
Head of External Relations
Managing Director of Networks
Board of Directors Tenure
Average tenure of the SSE board of directors:
- The tenure for the SSE board of directors is about average.
Board of Directors
CEO & Executive Director
Finance Director & Executive Director
Wholesale Director & Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Recent Insider Trading
Who owns this company?
We assess SSE's management by checking for:
- Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
- Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
- Is the average tenure of the management team less than 2 years? (1 check)
- Is the average tenure of the board of directors team less than 3 years? (1 check)
SSE has a total score of 6/6, this is not included on the snowflake, see the detailed checks below.
Note: We use the top 6 management executives and board members in our calculations.
Note 2: Insider trading include any internal stakeholders and these transactions
Full details on the Management part of the Simply Wall St company analysis model.
SSE plc produces, generates, distributes, and supplies electricity and gas, as well as other energy-related services in the United Kingdom and Ireland. It operates through three segments: Wholesale, Networks, and Retail. The company generates electricity from gas, oil, coal, water, and wind. Its electricity networks transmit and distribute electricity to approximately 3.7 million businesses, offices, and homes through approximately 130,000 kilometers of overhead lines and underground cables; and gas networks distribute gas to approximately 5.7 million homes, offices, and businesses through 75,000 kilometers of gas mains. The company also supplies electricity and gas to approximately 9 million households and businesses under the SSE, Scottish Hydro, Southern Electric, SWALEC, Atlantic, and Airtricity brands. In addition, it maintains and replaces street and highway lighting; designs, builds, owns, and operates networks for electricity, gas, water, and heat; and provides network capacity, bandwidth, and data center services. Further, the company offers energy-related products and services, including home services, such as gas boiler covers, central heating and wiring maintenance and installation, telephone line rental, and calls and broadband services; and supplying, installing, maintaining, and reading meters in the household, commercial, industrial, and generation sectors. The company was formerly known as Scottish and Southern Energy plc and changed its name to SSE plc in September 2011. SSE plc was incorporated in 1989 and is based in Perth, the United Kingdom.
|Market Cap:||£14,119 million|
Inveralmond House, Perth, PH1 3AQ, United Kingdom