SSE Shares Drop After Jefferies Downgrade

Shares of SSE (LON:SSE) declined after Jefferies changed its rating from “buy” to “hold” due to updated risk-reward evaluations following SSE’s recent trading update for the first half of fiscal year 2025.

At 8:08 AM (1208 GMT), SSE was down 1.6%, trading at £1,861.

Jefferies kept its price target at 2,050p but noted limited upside given the stock’s strong recent performance and high valuation. Concerns about SSE’s near-term growth prospects persisted, despite its financial figures being broadly in line with expectations.

Since February, SSE’s share price has increased, now trading at 10 times its projected FY26 EV/EBITDA, which Jefferies sees as matching peers. This higher valuation and sector trends suggest a more balanced risk-reward profile, limiting significant future appreciation after earlier gains this year.

The latest trading update indicated an EPS of 45p for the first half of fiscal year 2025, a year-on-year increase of 22%. Jefferies’ forecasts align with this guidance, projecting 1H EBIT at £791m, up 14% from the previous year. Key areas like Networks and Renewables are expected to show solid gains, with Networks contributing £456 million in EBIT and Renewables contributing £206 million.

However, the Thermal and Gas Storage segment is projected to perform more modestly in the first half, contributing only £40 million, despite an overall forecast of over £200 million for the full year. Jefferies noted a cautious outlook for SSE beyond the current fiscal year, especially in Thermal and Gas Storage, with a 15% reduction in FY25 EBIT for this division due to expected heavier second-half performance.

Renewables are seen as a vital growth sector, with an increase in FY25 EBIT forecasts. Jefferies pointed out execution risks tied to SSE’s offshore wind project, Dogger Bank, which has seen delays in commissioning, raising concerns around costs and timelines.

Jefferies stated that progress on turbine installations is crucial for mitigating stock risks linked to these execution issues. Currently trading at 10x FY26 EV/EBITDA and offering a 3.7% dividend yield for FY26, there seems to be little potential for further multiple expansion shortly, with the dividend trailing the sector average of about 5%.

The unchanged price target of 2,050p suggests an expected 12-month total shareholder return of around 11.5%. Jefferies anticipates SSE to trade on a 12x FY26 P/E multiple, based on stable grid revenues and power prices. A downside scenario estimates a price drop to 1,600p due to weak power prices, while an upside scenario could see the stock climb to 2,300p if power prices exceed forecasts.