SSE: Clarity on capex and capital unlocks long-term value

In a sector facing rising costs, tighter funding conditions and delivery risk, SSE PLC (LSE:SSE) has emerged from reporting season as one of the best-positioned utilities in Europe.

Shares in the UK-based power and grid operator have been broadly stable, but the underlying story suggests investors may be underestimating its potential for growth and re-rating.

UBS and JP Morgan both list SSE as a top pick. UBS prefers integrated utilities over pure generators and regulated networks, citing SSE’s blend of electricity generation, distribution and supply as well as its disciplined approach to investment.

JP Morgan, meanwhile, upgraded its price target from 2,075p to 2,150p, arguing that a shift towards a “value over volume” strategy in capital expenditure marks the beginning of a more balanced growth phase.

That shift was evident in the group’s full-year results. SSE reduced planned capital expenditure by £3 billion, twice the cut JP Morgan had forecast. The company reiterated its medium-term growth goals but signalled a more selective approach to new projects. Management is targeting investments that meet a higher equity return threshold, up 100 basis points, amid rising capital costs and tighter supply chains.

Offshore wind remains a strategic focus, but recent events, including Ørsted’s cancellation of Hornsea 4 and rising tender costs, have highlighted the risks of overstretching.

SSE’s own zero-subsidy IJmuiden project in the Netherlands could be at risk of cancellation or re-bidding as developers reassess risk-adjusted returns. UBS noted that governments still require large-scale renewables but are competing harder for capital, which gives well-capitalised players like SSE a strategic advantage.

Still, the company’s guidance for net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) of 4.0 times has raised questions over its headroom to fund growth beyond 2027.

JP Morgan acknowledged this concern but said it expects the issue to be resolved in the coming months as clarity emerges on the next electricity transmission price control and UK power market reforms. Both are expected to shape funding and return expectations into the next decade.

There are other levers too. SSE retains the capacity to raise hybrid debt and could pursue non-core disposals to bolster funding. The business has already demonstrated this flexibility with past sales of telecoms and smart meter operations.

Meanwhile, its regulated electricity transmission division remains a pillar of value. Investment in grid infrastructure is increasingly central to the energy transition, and SSE is likely to benefit from both new regulatory allowances and long-term policy support for decarbonisation.

UBS cited the Iberian blackout as a reminder of the strategic importance of grids and noted that several European utilities are preparing for higher allowed returns as governments confront delivery challenges.

The company’s long-term capital investment plan remains anchored in projects that integrate renewables with reliable infrastructure. Its electricity networks arm is well-regarded by regulators and central to UK energy strategy.

Coupled with a capital-light pipeline of generation assets, SSE is aiming to deliver predictable returns without the volatility seen in merchant-exposed peers.

At 1,970p (UBS) and 2,150p (JP Morgan), target prices suggest meaningful upside from current levels. While questions remain over funding beyond 2027, analysts agree the answers are in sight.

A more disciplined approach to investment and a clearer roadmap for earnings growth have made SSE one of the few utilities ready to build, and build wisely, in a more expensive world.

The shares were off 1% at 1,738.5p.