New Value Analysis of SSE Plc (LSE:SSE)
New Value Analysis of SSE Plc (LSE:SSE)
A new value analysis of SSE Plc (LSE:SSE), a company listed on the London Stock Exchange, has been added to our research pages here. SSE provides energy to customers in UK and Ireland. SSE produces and distributes electricity and gas and provides other energy-related services.
The data item in the SSE Annual Reports that has the possibility to confuse investors and especially value investors is the earnings data. The difference between reported earnings and underlying earnings has a significant impact on assessing how cheap SSE looks. The difference between reported earnings and underlying earnings has been significant since 2012 although was not such a significant factor in the 2017 Annual Report.
The impact of the prior years’ reported and underlying earnings is important because a value investor should look at prior years’ earnings data to get a feel for the consistency of earnings. The consistency of earnings allows a value investor to give significant weight to the price to earnings ratio and then decide whether the current price represents good value or not. SSE’s reported earnings look very erratic and so would require a value investor to be careful when assessing the price that could be paid for this company’s earnings.
Underlying earnings are more consistent than reported earnings in SSE’s Annual Reports so if the underlying earnings data could be relied upon it would help value analysis. A value investor could have confidence in assessing the current price against the underlying earnings numbers as a way of assessing whether the current price is a good one in comparison with earnings. In the Annual Reports SSE provides an explanation for the difference between reported and underlying earnings in all the years from 2012. In the 2017 Annual Report underlying earnings are higher than reported earnings and are relatively close together so that SSE looks cheap on either reported or underlying earnings numbers.
In the 2016 Annual Report the difference between underlying and reported earnings is very wide. Reported earnings were 46p, but underlying earnings were 119p. The main cause of the difference between underlying and reported earnings was £890 million of exceptional items. The exceptional items come from SSE management’s decisions to write down the value of a coal-fired power station, three gas power stations and gas production assets in the North Sea. None of the write downs create cash requirements for the business so value investors can use underlying earnings to assess the earnings statistic for the financial year 2016.
The year’s prior to 2016 have similar non-cash write downs so the underlying earnings numbers can be considered realistic to assess earnings against the share price. If underlying earnings are a reasonable way of looking at SSE earnings SSE would be considered cheap by value investors.
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