SSE Shares Decline After Jefferies Downgrades to “Hold”

Shares of SSE experienced a decline after Jefferies downgraded its rating from “buy” to “hold.” This change in recommendation was based on the analysts’ updated evaluation of the stock’s risk-reward dynamics following SSE’s recent trading update for the first half of fiscal year 2025.

As of 8:08 am (1208 GMT), SSE’s shares were down by 1.6%, trading at £1,861. Despite the downgrade, Jefferies maintained its price target at 2,050p, though it noted that the stock’s recent strong performance and current valuation limit its potential for further gains.

Jefferies’ downgrade is indicative of concerns regarding SSE’s near-term growth prospects, even as the company’s financial performance remained generally stable. SSE has seen a notable increase in its share price since February, currently trading at a valuation of 10 times its projected FY26 EV/EBITDA, which Jefferies considers consistent with industry peers. This higher valuation, combined with trends across the sector, led analysts to conclude that the stock’s risk-reward profile is now more evenly balanced. Given the momentum the shares gained earlier this year, there appears to be limited opportunity for significant appreciation.

SSE’s trading update provided clarification on the expected earnings for the first half of fiscal year 2025, forecasting an earnings per share (EPS) of 45p, marking a 22% year-on-year growth. This aligns with company guidance, and Jefferies’ projections for the period reflect these expectations.

The analysts forecast a first half EBIT of £791 million, representing a 14% increase compared to the previous year, with key divisions such as Networks and Renewables exhibiting solid growth. Networks are anticipated to contribute £456 million to overall EBIT, while Renewables are expected to add £206 million. However, within the Thermal and Gas Storage division, which is projected to generate over £200 million in EBIT for the entire year, the first half performance was more subdued, with only £40 million contributed.

Despite these robust headline figures, Jefferies urged caution regarding SSE’s outlook in the longer term. A 15% reduction in FY25 EBIT for the Thermal and Gas Storage division indicates a more conservative view, with Jefferies noting the company’s comments about a significant second-half weighting for this segment. Conversely, Renewables, a vital growth area for SSE, is expected to perform better, prompting an increase in the FY25 EBIT forecast for that division by 1%.

Beyond the immediate financials, Jefferies also noted potential execution risks surrounding SSE’s major offshore wind project, Dogger Bank. The project has faced delays in the commissioning of its A phase, which could impact the timelines and costs of subsequent phases. Although SSE has assured that the returns from the project remain generally consistent with original projections, Jefferies emphasized the necessity for tangible progress on turbine installations to alleviate market concerns regarding these execution risks.

With SSE currently trading at a 10x FY26 EV/EBITDA ratio and offering a dividend yield of 3.7% for FY26, Jefferies sees limited room for further multiple expansion in the near future. The dividend yield falls short of the broader sector average of around 5%, possibly dampening investor enthusiasm.

Jefferies’ price target remains set at 2,050p, suggesting a 12-month total shareholder return of approximately 11.5%. The brokerage’s base case scenario predicts that SSE will trade at a 12x FY26 P/E multiple and a 10.5x EV/EBITDA ratio, contingent on stable grid revenues and power prices. In a downside scenario, shares could potentially drop to 1,600p due to weaker than anticipated power prices and diminished grid returns, while an upside scenario could see the stock rise to 2,300p if power prices and grid earnings exceed current forecasts.