Can SSE PLC Make £2 Billion Profit?

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) to ascertain if it can make £2bn in profit. 

Have we been here before?

A great place to start assessing whether or not SSE can make £2bn in profit is to look at the company’s historic performance. It would appear that SSE has never been able to make a net profit of £2bn, although the company did report a pre-tax profit of £2.1bn for 2011 but it unlikely that SSE will be able to repeat this performance in near future.

Unfortunately, since 2011 SSE’s profitability has only declined, as around £3bn of writedowns and one-off charges have taken their toll on profits during the past two years. As a result, SSE’s net profit has slumped from a from a high of £1.5bn reported during 2011, to £400m for 2013. 

But what about the future?

It would appear that the future only holds more bad news for SSE. In particular, one of the biggest issues currently facing the company is the prospect of a government cap, on the price the company is allowed to charge customers for electricity.

centrica / sseThat said, a cap is unlikely to come into place before the next general election. That being said, this week’s revelation that the energy market regulator, Ofgem is recommending a two year probe of the energy market by the Competition and Markets Authority, brings into question SSE’s future. As a consequence of this referral, calls to break apart the UK’s big six energy suppliers have only intensified. 

What’s more, City analysts expect that SSE will need to raise UK power bills by around £40 per household this year to compensate for rising costs. However, an increase of this magnitude only a few months before a general election would be politically damaging and only likely to add to negative opinion directed towards the company. As a result, it is unlikely that SSE will increase prices, which will put margins under further pressure.

Still, there is actually evidence to suggest that UK energy bills are too high. Indeed, SSE claims to make a profit margin of between 5% and 6% from retail customers. Within Europe power companies have to make do with a profit margin of 2% to 3% and many believe there is no reason why SSE cannot move back to this level.

If SSE’s retail profit margin fell to the level above, the company would be in dire straits. For example, SSE reported a profit of £410m from its retail operations during its 2013 financial year. A 50% cut in profit from retail operations could reduce this to £205m.

To put this in some perspective, during 2013 SSE’s dividend payout cost a total of £515m.

Foolish summary

So overall, I feel that SSE cannot make £2bn profit. 

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In the meantime, please stay tuned for my next verdict.

Rupert does not own any share mentioned within this article.