Lakehouse — Creating a platform for earnings growth

Lakehouse — Creating a platform for earnings growth

The key signals from Lakehouse’s 2017 results are that the mainstream, core operations are back on track and are ready to improve further. The group has undergone restructuring, which had the effect of reducing revenue in 2017 at the group level, to improve the quality of its earnings. That process included downsizing Property Services, the sale of Orchard Energy (non-core) and increasing its presence in energy services and gas compliance. During the year to September 2017, Lakehouse won orders for £580m of new work (equal to 2x 2017 revenue). It is on frameworks with a value of £1.9bn, £0.3bn more than the previous year. The order book at end FY17 was up 19% at £631m. The business is well positioned and, with net debt at a “norm” run rate of £11m at y/e, has a robust balance sheet.

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Lakehouse

Creating a platform for earnings growth

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31 January 2018

Price

39.5p

Market cap

£62m

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Share details

Code

LAKE

Listing

AIM

Shares in issue

157.5m

Business description

Lakehouse is engaged in asset and energy support services businesses, focused on customers in the UK outsourced public and regulated services sectors. It comprises four divisions: Property Services, Compliance, Energy Services and Construction.

Bull

Property Services restructure complete.

Gas compliance performance encouraging.

Demand for its activities remains positive from the blue-chip customer base. Large order book.

Bear

Restructure not fully proven.

Markets are competitive.

Carillion impact, slow contract settlements.

Analysts

Stephen Rawlinson

+44 (0)20 3077 5700

Toby Thorrington

+44 (0)20 3077 5721

Lakehouse is a research client of Edison Investment Research Limited

The key signals from Lakehouse’s 2017 results are that the mainstream, core operations are back on track and are ready to improve further. The group has undergone restructuring, which had the effect of reducing revenue in 2017 at the group level, to improve the quality of its earnings. That process included downsizing Property Services, the sale of Orchard Energy (non-core) and increasing its presence in energy services and gas compliance. During the year to September 2017, Lakehouse won orders for £580m of new work (equal to 2x 2017 revenue). It is on frameworks with a value of £1.9bn, £0.3bn more than the previous year. The order book at end FY17 was up 19% at £631m. The business is well positioned and, with net debt at a “norm” run rate of £11m at y/e, has a robust balance sheet.

A step back to move ahead in the future

Group revenue from continuing operations fell 3% to £290m in the year to end September 2017 and EBITA fell to £7.3m vs £8.5m in the prior year, including substantial investment in training and development charged to the P&L (£1.3m). The main changes were that revenue in Gas Compliance rose by 15% to £104m and fell 52% to £47m in Property Services. PBT for the year was £5.6m, in line with market expectations, and underlying EPS was 3.7p. Company guidance for FY18 is that revenue in the two core operations will increase and net operating margins will be 7-8%. In Property Services the £1.7m loss in 2016/17 will improve to around break-even, according to management. In Construction, the company expects a net operating margin of 3% on revenue of £60-70m.

Realistic earnings development expected

Consensus forecasts for the current year will be unchanged on the results, in our view. There are greater than average uncertainties in the construction and smart meter markets in the current year. Lakehouse needs more time to show further gains from the restructure, without stretching expectations too far in the short term. The range of outcomes depends in part on assumptions about the mix of work, which is always hard to gauge at this stage of the year. At 39.5p and with a FY18e consensus dividend of 1.0p (vs 0.5p for FY17), the stock offers a 2.5% yield. The company is committed to raising dividends with earnings and we believe that market consensus is on the low side, in terms of “normal” levels of cover.

Valuation is attractive versus peers

The difficult history of Lakehouse since flotation, including an EGM and a change in management, remains a valuation drag. Given the turnaround, this could provide a buying opportunity. At c 9.9x FY18e P/E, the stock trades at a discount to its peers.

Consensus estimates (continuing business)

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

299.1

7.5

5.2

1.5

7.6

3.8

09/17

290.3

5.6

3.7

0.5

10.7

1.3

09/18e

287.0

8.2

4.0

1.0

9.9

2.5

09/19e

297.5

10.6

5.2

1.5

7.6

3.8

Source: Bloomberg

Lakehouse is a research client of Edison Investment Research Limited

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2018]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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