SSE reaped the rewards of changes to household energy price caps as underlying operating profits soared 65% to £2.5bn in the year to 2023.

Changes to the price cap due to surging energy prices meant energy suppliers were given the opportunity to hike prices during the last year.

Clearly conscious of the optics of benefitting at the expense of UK consumers, SSE said they had invested more in CAPEX to help energy security than they made in profits. 

Carefully positioned on the first line of the report, SSE confirmed they had allocated £2.8bn to CAPEX and investment during the period – more than the £2.5bn operating profits generated.

SSE’s existing investors will be pleased that even after the significant levels of investment, there was still cash left over to increase the dividend for the 2023FY. However, income-seeking investors may be perturbed that the company is rebasing the dividend to 60p next year to allocate further funds to investment.

The slashing of the dividend signals SSE may soon be viewed as a growth proposition instead of an income play.

SSE shares were 1.2% higher at the time of writing.

“SSE’s networks deliver electricity across Scotland and Southern England. This is classic utility territory – with revenues and profits closely regulated,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

“SSE’s announced it’s staying the course with its pivot towards renewable energy. Turbo-charging efforts to renewables is a bold and admirable move. But the shift to renewables comes with a hefty dose of risk – they’re not always reliable. To some degree, it’s at the mercy of mother nature. That reality hit home last year as unseasonably calm and dry weather left the group’s renewable output lower than planned, meaning flexible gas-fired plants had to plug the energy shortfall. Fortunately, these are still part of SSE’s offering and helped to majorly boost profits – allowing the group to surpass its recently upgraded earnings per share (EPS) guidance.

“However, in a bid to free up cash to fund the renewables investment, SSE reiterated its plans to slash its dividend down from 96.7 to 60p next year. Investors reacted positively, with the shares showing small gains in early trading. As we move towards a net-zero world, the need for investment in renewables and networks is clear, and SSE’s ahead of the pack in this regard. But the transition will be costly, and it’ll likely be a long road until renewables can generate cash more reliably, which adds a layer of risk to SSE in the near-to-medium term.”

The FTSE 100 was broadly flat on Tuesday as debt ceiling talks progressed, but economic data signalled slowdowns in major economies.

The FTSE 100 swung between gains and losses on Tuesday. The index opened lower before improving through the session to trade positively. The US open coincided with London’s leading index giving up gains to trade flat at the time of writing. The S&P 500 opened up down around 0.5% before buyers stepped in.

Helping improve sentiment, debt ceiling talks in the US were showing signs of progress.

“Experience tells investors that these stand-offs always end with a last-minute deal so the market is mostly taking this saga in its stride, particularly given commentary from both sides seems to be increasingly conciliatory,” said AJ Bell investment director Russ Mould.

“Just how close Washington must push for there to be a genuine fear of default is an open question, but right up to the eleventh hour, or in other words the end of this month, the expectation is likely to remain that a deal will be done.”

The FTSE 100 outperformed other major European indices after a string of poor economic data released on Tuesday hit stocks on the continent.

The German and US manufacturing sectors have contracted faster than expected, raising fears the global economy was starting to slow. Services data was better than expected and suggested there were still areas of strength in the economy.

FTSE 100 movers

RS Group was the FTSE 100’s top faller after the electronics company said they ‘are mindful of near-term external challenges.’ RS Group’s operating adjusted profit grew 18%, and its operating margin expanded in 2023, but investors were clearly more concerned about performance in the year to come.

RS Group was down over 7% at the time of writing.

The IMF raised its forecasts for UK growth on Tuesday and now thinks the UK will avoid a recession this year. However, it suggested that rates would remain higher for longer than many thought.

The impact this may have was evident in FTSE 100 consumer stocks which were among the top fallers.

B&M, Frasers Group, JD Sports and Next were all down on Tuesday. Housebuilders were also suffering.

The FTSE 100’s top risers were dominated by stocks with substantial dividend yield suggesting investors were seeking income-bearing assets that could compensate for any potential downside in stock prices.

British Land, Vodafone, British American Tobacco and Kingfisher were the top risers on Tuesday.

This group is the UK’s premier tile specialist.

Topps Tiles (LON:TPT) is a market leading, omni channel domestic retailer serving homeowners, trade customers and contractors.

It is now celebrating its 60 years of trading, supplying tiles for everyone since 1963.

After announcing its first half results for the 26 weeks ended 1^st April, it is now showing a return to profitable growth, especially as its second half year is the stronger trading period.

The £101m capitalised group, which like UK industry generally, was suffering from supply chain and recruitment pressures, however they now seem to be easing, with product availability and movement of goods normalised.

Adjusted operating expenses saw an increase of 7.4%, due to inflation, which were partially offset with store closure cost reductions.

The adjusted pre-tax profit was down as a result of inflation and some one-offs, however the group is confident of a materially more profitable H2 and in hitting full year expectations.

Group revenues were up 9.3% at £130.3m (£119.2m) while its adjusted interim profits before tax were down 38% at £4.4m (£7.1m), with earnings falling 44.5% to 1.57p (2.83p), while the interim dividend was actually increased 20% to 1.2p (1.0p) per share.

The group has a very robust balance sheet and ended the first half with an impressive net cash of £19.9m, together with a useful £49.9m headroom within committed borrowing facilities.

CEO Rob Parker commented that:

“As expected, our first half profitability reflects the impact of inflation year on year, including significantly increased energy costs, and a number of other one offs. 

These effects are now reducing or will reverse in full in the second half, underpinning our confidence in a much stronger profit performance in the balance of the year. 

Our strong trading, when combined with our successful strategy, world class customer service, leading product offer and strong balance sheet, gives us increasing confidence in our outlook. 

We remain confident that we are on track to hit our 20% market share target ahead of schedule.”

Management Outlook

Profit in the second half is expected to increase materially, which should be driven by the growth of the group’s new businesses, by its improving gross margins, giving confidence that it will perform in line with current market expectations for the year as a whole.

Current market hopes are ranging from £10.6m to £12.3m adjusted pre-tax profits.

Analyst Opinion – Target Price 100p

Adam Tomlinson at Liberum Capital rates the group’s shares as a Buy, looking for 100p as his Target Price.

His estimate for the year to end September is for £261m sales (£247m), while profits ease to £11.3m (£15.6m), earnings fall to 4.0p (6.3p) but with a steady 3.6p dividend per share.

For the coming year he is going for £271m sales, £12.9m profits, earnings of 4.6p and a held dividend at 3.6p per share.

He clearly states that the shares are cheap, offering a double-digit free cash flow and a 7% plus yield.

Conclusion – a move above 60p looks inevitable

Topps is the largest specialist distributor of tiles and related products in the UK.

The majority of its revenues are generated from the domestic market for the renovation, maintenance and improvement of UK homes.

The Q3 Trading Statement is due to be announced in the first week of July at which time we can expect an update on the progress towards the end of its trading year.

Having faced some real struggles in the last couple of years this group is now back on the upward path, its shares now up 2% at 51.5p will soon reflect that growth.

Newly-listed Dowlais has made a robust start to life as a standalone listed entity after being spun out by Melrose earlier this year.

Dowlais generated £1.9bn revenue in the four months to 30th April – a 9% increase on the same period a year ago.

The Automotive unit produced materially better revenue in the period, and operating margins expanded. The growth resulted from increased activity in their battery electric vehicle business as underlying demand ramped up. Automotive revenue grew 11%.

Powder Metallurgy revenue and margins were consistent with 2022.

“Dowlais’ Automotive division performed well given the challenging economic backdrop, where not every consumer’s confident enough to go out and sign the dotted line for a new car,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

“The global automotive market’s only expected to grow by 3% this year, so it was pleasing to see the Automotive division’s revenues jump by double digits. This highlights the group’s market-leading position in car components, which is helping to drive group performance forward. And with the transition to electric vehicles looking inevitable, Dowlais looks set to be a beneficiary as its electric vehicle order book continued to grow.

“But it appears not all cogs were turning in the right direction. The performance of the group’s Powder Metallurgy division was underwhelming, with revenues and margins flat year-on-year. Despite this, Dowlais’ full-year expectations remain on-track.”

The FTSE 100 was broadly flat on Monday as investors readied for UK inflation data later this week and the resultant implications for the Bank of England.

The FTSE 100 was up 4 points to 7,761 at the time of writing.

“Despite the UK stock market having ground to a halt in recent weeks, there is no reason to panic. Year-to-date the FTSE 100 is up 4.4%. Annualised that would equate to an approximate 10% return, and if you add on 3% dividend yield, you’re looking at a potential 13% total return which is slightly better than one might expect from UK equities in a normal year. So far, so good,” said Russ Mould, investment director at AJ Bell.

Mould continued to explain corporate updates are starting to slow after weeks of final results and Q1 updates, and the focus will shift to economic data points and central bank commentary.

“The week ahead is fairly quiet when it comes to corporates updating on trading, with only a few names in the retail, tech and utilities space standing out. That means market sentiment is likely to be driven by political and economic events, including any update on the US debt ceiling talks, UK inflation data and the minutes from the latest Federal Reserve interest rate meeting on Wednesday, as well as insight into durable goods orders and personal spending in the US at the end of the week.”

This week could mark a step change in UK inflation data, with economists predicting that UK CPI in April will fall below 10%.

“We are expecting the pace of the cooling in UK inflation to quicken markedly in April, from 10.1% to 8.3%, and this will likely help those amongst the Bank of England’s rate setting committee breath a sigh of relief,” said Joshua Raymond, Director at online investment platform XTB.com.

“Whilst this would be the lowest rate of UK inflation since April 2022, it’s unlikely to drastically change the outlook for UK rates in the coming months, where the market is still forecasting around two separate hikes of 0.25%, yet that could change if we see UK inflation fall faster than expected to 8% or below.”

NatWest

NatWest shares were 1% higher after the UK government further sold down their stake in the bank. The government sold a £1.26bn stake in NatWest to reduce their total holding from 41.4% to approximately 38.6%.

“The UK government has sold another chunk of shares in NatWest but the fact it is still left holding 38.6% means there continues to be a big overhang for the stock, which is likely to remain the case for some time given the slow pace of selling down,” said Russ Mould.

“After all, it’s been 15 years since the bank was bailed out by the government and the latter still owns more than a third of the company.”

JD Sports was the FTSE 100’s top riser, gaining 2.7%, as bargain hunters stepped in to pick up shares after a sharp selloff on Friday.

Bargain hunters also showed interest in Ocado and Burberry after recent declines in the stocks. Ocado is the FTSE 100’s worst performer this year after shedding approximately of its value.