Calculating The Fair Value Of SSE plc (LON:SSE)

editorial-team@simplywallst.com (Simply Wall St)

Fri, May 16, 2025, 2:31 AM 5 min read

• Using the Dividend Discount Model, SSE just worth estimation is UK£18.37

• Current stock terms of UK£17.17 suggests SSE is perchance trading adjacent to its just value

• Our just worth estimation is 11% little than SSE's expert terms people of UK£20.60

Today we'll bash a elemental tally done of a valuation method utilized to estimation the attractiveness of SSE plc (LON:SSE) arsenic an concern accidental by estimating the company's aboriginal currency flows and discounting them to their contiguous value. This volition beryllium done utilizing the Discounted Cash Flow (DCF) model. There's truly not each that overmuch to it, adjacent though it mightiness look rather complex.

We mostly judge that a company's worth is the contiguous worth of each of the currency it volition make successful the future. However, a DCF is conscionable 1 valuation metric among many, and it is not without flaws. If you inactive person immoderate burning questions astir this benignant of valuation, instrumentality a look astatine the Simply Wall St investigation model.

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As SSE operates successful the electrical utilities sector, we request to cipher the intrinsic worth somewhat differently. Instead of utilizing escaped currency flows, which are hard to estimation and often not reported by analysts successful this industry, dividends per stock (DPS) payments are used. This often underestimates the worth of a stock, but it tin inactive beryllium bully arsenic a examination to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments volition proceed to summation astatine a sustainable maturation complaint forever. The dividend is expected to turn astatine an yearly maturation complaint adjacent to the 5-year mean of the 10-year authorities enslaved output of 2.3%. We past discount this fig to today's worth astatine a outgo of equity of 6.4%. Compared to the existent stock terms of UK£17.2, the institution appears astir just worth astatine a 6.6% discount to wherever the banal terms trades currently. The assumptions successful immoderate calculation person a large interaction connected the valuation, truthful it is amended to presumption this arsenic a unsmooth estimate, not precise down to the past cent.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= UK£0.8 / (6.4% – 2.3%)

= UK£18.4

We would constituent retired that the astir important inputs to a discounted currency travel are the discount complaint and of people the existent currency flows. You don't person to hold with these inputs, I urge redoing the calculations yourself and playing with them. The DCF besides does not see the imaginable cyclicality of an industry, oregon a company's aboriginal superior requirements, truthful it does not springiness a afloat representation of a company's imaginable performance. Given that we are looking astatine SSE arsenic imaginable shareholders, the outgo of equity is utilized arsenic the discount rate, alternatively than the outgo of superior (or weighted mean outgo of capital, WACC) which accounts for debt. In this calculation we've utilized 6.4%, which is based connected a levered beta of 0.800. Beta is simply a measurement of a stock's volatility, compared to the marketplace arsenic a whole. We get our beta from the manufacture mean beta of globally comparable companies, with an imposed bounds betwixt 0.8 and 2.0, which is simply a tenable scope for a unchangeable business.