The SSE (LSE: SSE) share price has put in a strong performance in 2019. Excluding dividends to investors, the stock is up around 11.7% over the past 12-months, marginally outperforming the FTSE 100 over the same period.
It seems as if investors have been encouraged by the company’s operating performance and the £500m deal to offload SSE’s retail energy business to challenger Ovo.
SSE has been trying to unload this tricky business for some time, but it has struggled to find a buyer. Management had been considering an IPO next year, following the collapse of a previous agreement to merge it with German-owned Npower, but Ovo stepped in with an offer just in time.
Re-focusing the business
SSE decided to sell its retail division as part of management’s strategy to focus on its power generation business and regulated energy networks. This will streamline the enterprise and take it out of the highly competitive retail supply market.
The fact that it took so long to offload this business really speaks volumes about how difficult it has become for energy suppliers in the current market. So, it looks as if SSE’s decision to sell was a good one.
However, the sale isn’t a reason to buy the stock, in my opinion. While the sale of the retail business is good news, the group still has some severe structural issues to contend with. These include high levels of debt and stagnating levels of profitability.
On top of these issues, SSE is having to deal with increasingly sceptical regulators and politicians who are trying to control profit margins in the regulated utility industry.
So, while SSE might look attractive as an income play, I’m wary about its long-term prospects. Indeed, I would rather buy ingredients manufacturer Treatt (LSE: TET) based on its growth prospects and track record of creating value for shareholders.
Unlike SSE, which has seen its revenues slump from £31bn in 2014 to £27bn for 2018, a decline of 13%, Treatt’s revenues jumped 51% over the same time frame. The group’s net profit surged 240% over this period.
And it looks as if this trend is going to continue. According to a trading update for the year ended 30 September 2019 published today, management is forecasting revenue for the year to be approximately £112.7m, an increase of 1%.
Substantial falls in raw materials prices will also help the company’s bottom line. According to the update, the cost of orange oil, which represents approximately 33% of group revenue, has fallen more than 50% over the past 12 months.
The company is also in the process of doubling its US capacity, which should help improve growth in the years ahead. Management expects to see initial benefits over the next financial year from this Capex project. With more than £15m of cash on the balance sheet as well, Treatt has plenty of capital to pursue its growth plans and return a percentage of profits to shareholders.
It is already doing this. The stock currently supports a dividend yield of 1.3%, and the payout is covered 3.4 times by earnings per share.
So that’s why I’d sell SSE to buy Treatt today.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Treatt. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.