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Research: Industrials
The biggest takeaway from Sureserve Group’s interim result was its strong cash performance in the first half, with net debt falling to £3.5m at end March (£12.9m at end March 2018). This sets a solid base for the group to ride out the disruption of the lockdown. Our focus is on the outlook, with H1 only having eight days of impact from the lockdown. We have reduced our estimates for FY20, with the bulk of the revenue cut from £230m to £210m being a £13m cut in the Energy Services division. The cut to PBT from £9.8m to £9.1m is less severe, reflecting the improving efficiency in the Compliance division and the cost mitigation efforts of the group. With the long-term investment themes of regulatory compliance and energy efficiency likely to stay in focus, we see solid support for the group’s business and our FY21 numbers reflect the start of a bounce back in activity.
Sureserve Group |
Creditable performance through the lockdown |
Interim results update |
General industrials |
27 May 2020 |
Share price performance
Business description
Next events
O Analysts
Sureserve Group is a research client of Edison Investment Research Limited |
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The biggest takeaway from Sureserve Group’s interim result was its strong cash performance in the first half, with net debt falling to £3.5m at end March (£12.9m at end March 2018). This sets a solid base for the group to ride out the disruption of the lockdown. Our focus is on the outlook, with H1 only having eight days of impact from the lockdown. We have reduced our estimates for FY20, with the bulk of the revenue cut from £230m to £210m being a £13m cut in the Energy Services division. The cut to PBT from £9.8m to £9.1m is less severe, reflecting the improving efficiency in the Compliance division and the cost mitigation efforts of the group. With the long-term investment themes of regulatory compliance and energy efficiency likely to stay in focus, we see solid support for the group’s business and our FY21 numbers reflect the start of a bounce back in activity.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/18 |
190.8 |
6.6 |
3.4 |
0.25 |
12.6 |
0.6 |
09/19 |
212.1 |
8.3 |
4.5 |
0.50 |
9.4 |
1.2 |
09/20e |
209.8 |
9.1 |
4.6 |
0.50 |
9.2 |
1.2 |
09/21e |
229.5 |
9.8 |
5.0 |
0.75 |
8.5 |
1.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Doing all the right things to get through COVID-19
The long-term drivers of the investment case are around growing regulatory compliance to make buildings safer and improved energy efficiency. We believe both of these will only get more focus in the aftermath of COVID-19. Operating in a fragmented industry, often against smaller, private and regional competitors, Sureserve is likely to emerge from this crisis with less competition. Its working capital and cash management have been excellent. The group has had a head start of focusing on efficiency as part of its turnaround strategy and the additional measures of furloughing staff and the board taking pay cuts should continue to protect profitability and importantly cash.
The forecasting challenge for FY20 and FY21
While we have cut estimates, we note that there remains a heightened level of uncertainty around our estimates. The group has exposure to activities in Scotland and Wales, and both are yet to provide visibility on when activity will resume. Our scenario analysis suggests FY20 EBITA could range from £9.4m to £10.5m; we are currently at £10m. We also see some upside risk to our FY21 estimates with our modelling of the ‘bounce’ erring on the side of caution. The £323.7m order book underpins activity, the uncertainty is how much of this gets deferred short-term.
Valuation: 66p sum-of-the parts valuation
Our long-term valuation is 66p based on a sum-of-the-parts valuation. The Compliance division multiple has been eroded back from 11.8x in our last note to 8.4x, reflecting the drop in peer Mears’ rating. Offsetting this are lower central costs and an improved net debt position.
H1 interims: Good performance but lockdown impacts
Strong trading in the Compliance division
The Compliance division grew revenues by 11.6% in H120 and expanded EBITA margins to 5% versus 4% in H119. Over the last two years the group has looked to step up the service and efficiency within this division. The improving service levels have led to more work being won from the existing contract base. More gas boiler installation and electrical testing work, where margins are higher, have contributed to an improving margin mix.
Many of the workers in the Compliance division are designated key workers, reflecting the non-discretionary nature of the work. The group has worked with councils and local authorities to deliver services safely. The impact of the lockdown has led to some delays and the deferral of work and we are thus trimming our divisional revenue estimate for FY20 from £147m to £140m. However, the margin improvement has led us to nudge up our divisional EBITA estimate from £9.6m to £9.8m.
Energy Services division: More affected by the lockdown
The Energy Services division has two primary businesses:
■
Everwarm, which delivers energy efficiency solutions and technologies to help businesses and local authorities meet their carbon reduction targets.
■
Providor, a national smart meter installer that helps utility companies to meet their regulatory targets to install smart meters in every home by 2024.
H120 revenues were down 2% to £37.3m, reflecting less work at Everwarm, in part offset by a pick up in activity from Providor, continuing the momentum seen in H219. Despite the fall in revenues, EBITA margins improved from 5.0% to 5.2%. Providor, which was not profitable in H119 is now contributing to profits. The Everwarm business also benefitted from the Arbed 3 contract moving from a mobilisation phase in the comparative period last year to delivering in the current period.
Unlike the Compliance division, Energy Services workers have not been designated key workers. In addition, with significant parts of the contract base being in Scotland and Wales, where there is less visibility compared to England around a return to work, these businesses have not been delivering services during the lockdown and there remains some uncertainty around when this will resume. We have therefore cut our FY20 divisional revenue estimate from £86.2m to £72.8m. We have reduced our EBITA estimate from £4.7m to £3.8m.
IFRS 16 impact on the numbers
The group adopted IFRS 16 for the first time when reporting FY20 interims. The impact on the P&L is negligible, with PBT increasing by £0.1m. The balance sheet now has a £6.3m right-of-use asset net book value added to the non-current assets, offset by £3.2m and £3.1m of lease liabilities being recognised in current and non-current liabilities respectively. The cash flow overall is not affected, but our operating cash flow is boosted by £4.3m (our estimate for FY20 for the associated depreciation) offset by an equivalent increase in financing costs.
A key KPI that the group monitors is cash conversion, measured as a percentage of normalised operating cash generated divided by normalised operating profit. Sureserve targets an 80% conversion rate and for H120 it achieved 88%. The impact of IFRS 16 would result in a 160% cash conversion being achieved using statutory reported profit, due to the impact of depreciation inflating the operating cash flow. The group intends to use its historic measure for this KPI.
Net debt and banking facilities
The strong cash conversion saw net debt fall to £3.5m at end March 2020 from £12.9m in the comparable period last year. This position had continued to improve; at the time the interim statement was prepared, the group had a modest net cash position.
Part of this cash improvement is likely to be due to the deferral of VAT payments that the government has offered all businesses and in due course is likely to unwind. It also suggests that despite the Energy Services business not being active for April and May, the group has managed to navigate through this period with an improved cash position.
The group has a £25m revolving credit facility, which was renewed in December 2018, and runs until 31 January 2022. As at 26 May 2020, the group had drawn down £6.5m of this. In addition to this revolving credit facility the group has a £5m overdraft facility. This provides plenty of headroom for the coming year.
Exhibit 1: Financial summary
|
£m |
|
2017 |
2018 |
2019 |
2020e |
2021e |
Year end 30 September |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
INCOME STATEMENT |
|||||||
Revenue |
|
|
181.5 |
190.8 |
212.1 |
209.8 |
229.5 |
Cost of Sales |
(154.5) |
(163.4) |
(179.2) |
(176.3) |
(195.3) |
||
Gross Profit |
27.0 |
27.4 |
32.9 |
33.5 |
34.2 |
||
EBITDA |
|
|
9.0 |
9.2 |
10.5 |
15.2 |
15.6 |
Operating Profit (before amort. and except). |
|
|
7.4 |
8.0 |
9.4 |
10.0 |
10.7 |
Exceptionals and amortisation of acquired intangibles |
(11.0) |
(4.6) |
(3.0) |
(1.7) |
(0.6) |
||
Share-based payments |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Reported operating profit |
(3.6) |
3.4 |
6.4 |
8.3 |
10.1 |
||
Net Interest |
(2.0) |
(1.5) |
(1.1) |
(0.9) |
(0.8) |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
5.4 |
6.6 |
8.3 |
9.1 |
9.8 |
Profit Before Tax (reported) |
|
|
(5.6) |
1.6 |
4.9 |
7.5 |
9.8 |
Reported tax |
0.9 |
(0.8) |
(1.2) |
(1.7) |
(1.9) |
||
Profit After Tax (norm) |
6.4 |
5.8 |
7.1 |
7.3 |
7.9 |
||
Profit After Tax (reported) |
(4.6) |
0.8 |
3.8 |
5.8 |
7.9 |
||
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Discontinued operations |
4.6 |
(11.5) |
0.8 |
0.1 |
0.0 |
||
Net income (normalised) |
6.4 |
5.8 |
7.1 |
7.3 |
7.9 |
||
Net income (reported) |
0.0 |
(10.7) |
4.6 |
5.9 |
7.9 |
||
Average Number of Shares Outstanding (m) |
157.5 |
157.5 |
158.0 |
159.1 |
159.1 |
||
EPS (p) |
|
|
2.7 |
3.2 |
4.5 |
4.6 |
5.0 |
EPS - normalised (p) |
|
|
2.8 |
3.4 |
4.5 |
4.6 |
5.0 |
EPS - basic reported (p) |
|
|
0.0 |
(6.6) |
3.2 |
3.6 |
4.6 |
Dividend per share (p) |
0.50 |
0.25 |
0.50 |
0.50 |
0.75 |
||
Revenue growth (%) |
(44.5) |
5.1 |
11.2 |
(1.1) |
9.4 |
||
Gross Margin (%) |
14.9 |
14.3 |
15.5 |
16.0 |
14.9 |
||
EBITDA Margin (%) |
5.0 |
4.8 |
4.9 |
7.3 |
6.8 |
||
Normalised Operating Margin |
4.1 |
4.2 |
4.4 |
4.8 |
4.6 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
57.0 |
50.2 |
47.1 |
51.7 |
51.2 |
Intangible Assets |
51.4 |
47.9 |
44.5 |
43.0 |
43.0 |
||
Tangible Assets |
1.9 |
1.5 |
1.3 |
7.6 |
7.6 |
||
Investments & other |
3.7 |
0.9 |
1.2 |
1.1 |
0.6 |
||
Current Assets |
|
|
96.6 |
49.3 |
47.6 |
48.3 |
55.6 |
Stocks |
4.5 |
4.2 |
3.1 |
3.0 |
3.3 |
||
Debtors |
65.4 |
42.6 |
42.1 |
40.9 |
43.6 |
||
Cash & cash equivalents |
26.1 |
1.7 |
2.5 |
4.4 |
5.2 |
||
Other |
0.6 |
0.8 |
0.0 |
0.0 |
3.5 |
||
Current Liabilities |
|
|
(72.0) |
(57.4) |
(37.4) |
(41.8) |
(40.7) |
Creditors |
(71.0) |
(39.3) |
(36.7) |
(37.8) |
(36.7) |
||
Tax and social security |
0.0 |
0.0 |
(0.2) |
(0.3) |
(0.3) |
||
Short term borrowings |
(0.2) |
(13.0) |
(0.1) |
(3.3) |
(3.3) |
||
Other |
(0.9) |
(5.1) |
(0.4) |
(0.4) |
(0.4) |
||
Long Term Liabilities |
|
|
(31.3) |
(3.0) |
(13.0) |
(10.9) |
(6.9) |
Long term borrowings |
(27.2) |
(0.1) |
(9.8) |
(7.9) |
(4.9) |
||
Other long term liabilities |
(4.1) |
(2.9) |
(3.2) |
(3.0) |
(2.0) |
||
Net Assets |
|
|
50.2 |
39.1 |
44.3 |
47.4 |
59.3 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
50.2 |
39.1 |
44.3 |
47.4 |
59.3 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
9.0 |
8.9 |
10.2 |
15.2 |
15.6 |
||
Working capital |
5.7 |
(6.4) |
(1.1) |
0.1 |
(1.9) |
||
Exceptional & other |
(1.3) |
(8.2) |
(3.6) |
0.5 |
0.5 |
||
Tax |
0.7 |
(0.2) |
(0.0) |
(1.7) |
(1.9) |
||
Net operating cash flow |
|
|
14.0 |
(5.8) |
5.5 |
14.1 |
12.3 |
Capex |
(0.9) |
(0.4) |
(0.4) |
(1.0) |
(2.3) |
||
Acquisitions/disposals |
9.1 |
(1.6) |
0.4 |
0.0 |
0.0 |
||
Net interest |
(1.4) |
(1.1) |
(0.9) |
(0.9) |
(0.9) |
||
Equity financing |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Dividends |
(0.8) |
(0.8) |
(0.4) |
(0.8) |
(0.8) |
||
Other |
(0.3) |
(0.0) |
(0.3) |
(4.4) |
(4.4) |
||
Net Cash Flow |
19.8 |
(9.7) |
3.8 |
7.0 |
4.0 |
||
Opening net debt/(cash) |
|
|
21.0 |
1.3 |
11.4 |
7.4 |
0.4 |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
0.0 |
(0.4) |
0.1 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
1.3 |
11.4 |
7.4 |
0.4 |
(3.6) |
Closing total net debt/(cash) including lease liabilities |
|
|
1.6 |
11.6 |
7.5 |
6.8 |
2.8 |
Source: Sureserve Group accounts, Edison Investment Research
|
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