Analysts at RBC Capital Markets upgraded energy company SSE from ‘sector perform’ to ‘outperform’ on Wednesday after gaining clarity on UK windfall taxes.
RBC Capital Markets said SSE, like much of the UK utility space, had been “buffeted by macroeconomic concerns and risks around government intervention for much of 2022”.
The Canadian bank stated the Electricity Generator Levy announced in the Bank of England’s Autumn Statement last week will result in a 45% additional revenue tax on SSE for low carbon electricity sales above a threshold of £75 per megawatt hour from the start of 2023 until 31 March 2028.
“Given SSE’s conservative hedging policy we estimate the overall windfall tax exposure at £568.0m is relatively muted, and only 3% of current market cap. This could be reduced further if SSE, and others, successfully campaign for capex offsets,” said RBC.
RBC stated that now that it has clarity on windfall taxes, it thinks investors should now re-focus on SSE’s “attractive business mix” and “long-term growth prospects” aligned to the energy transition.
“The net impact of higher power prices and inflation alongside windfall taxes result in our earnings forecasts up roughly 15-30% over the next three years,” said RBC, who also increased its price target on the stock to 2,050.0p from 1,825.0p.
“We think investors are either valuing the networks or the renewables activities (together roughly 90% of estimated enterprise value) at a significant discount. We expect enhanced visibility on government interventions and thus achievable power prices, alongside network disposals and imminent visibility on allowed regulatory returns to all help close the valuation gap.”
Reporting by Iain Gilbert at Sharecast.com
