What is SSE.L's Intrinsic value?

SSE PLC (SSE.L) Intrinsic Value Analysis

Executive Summary

As of June 12, 2025, SSE PLC's estimated intrinsic value ranges from $209.66 to $2478.33 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $2405.89 +33.8%
Discounted Cash Flow (5Y) $2478.33 +37.9%
Dividend Discount Model (Multi-Stage) $1616.35 -10.1%
Dividend Discount Model (Stable) $1694.71 -5.7%
Earnings Power Value $209.66 -88.3%

Is SSE PLC (SSE.L) undervalued or overvalued?

With the current market price at $1797.50, the stock appears to be fairly valued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate SSE PLC's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 4.0% 4.5%
Equity market risk premium 6.0% 7.0%
Adjusted beta 0.72 0.76
Cost of equity 8.3% 10.3%
Cost of debt 4.0% 4.6%
Tax rate 25.0% 26.4%
Debt/Equity ratio 0.55 0.55
After-tax WACC 6.4% 7.9%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 7.1% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $10,132 (FY03-2025) to $13,344 (FY03-2035)
  • Net profit margin expansion from 13% to 14%
  • Capital expenditures maintained at approximately 21% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $2,478 $36,549M 78.2%
10-Year Growth $2,406 $35,759M 63.1%
5-Year EBITDA $991 $20,328M 60.8%
10-Year EBITDA $1,221 $22,831M 42.2%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 31.8%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 9.3%
  • Long-term growth rate: 3.0%
  • Fair value: $1616.35 (-10.1% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 10.3% (Low) to 8.3% (High)
  • Long-term growth rate: 2.0% (Low) to 4.0% (High)
  • Fair value range: $973 to $2,416
  • Selected fair value: $1694.71 (-5.7% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $834M
Discount Rate (WACC) 7.9% - 6.4%
Enterprise Value $10,618M - $12,984M
Net Debt $9,514M
Equity Value $1,104M - $3,470M
Outstanding Shares 11M
Fair Value $101 - $318
Selected Fair Value $209.66

Key Financial Metrics

Metric Value
Market Capitalization $19608M
Enterprise Value $29122M
Trailing P/E 15.52
Forward P/E 13.52
Trailing EV/EBITDA 3.70
Current Dividend Yield 209.85%
Dividend Growth Rate (5Y) -15.73%
Debt-to-Equity Ratio 0.55

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 30% $721.77
Discounted Cash Flow (5Y) 25% $619.58
Dividend Discount Model (Multi-Stage) 20% $323.27
Dividend Discount Model (Stable) 15% $254.21
Earnings Power Value 10% $20.97
Weighted Average 100% $1939.79

Investment Conclusion

Based on our comprehensive valuation analysis, SSE PLC's weighted average intrinsic value is $1939.79, which is approximately 7.9% above the current market price of $1797.50.

Key investment considerations:

  • Strong projected earnings growth (13% to 14% margin)
  • Consistent cash flow generation

Given these factors, we believe SSE PLC is currently fairly valued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.