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Market capitalisation
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Research: Industrials
Yesterday’s trading update confirmed the work management has undertaken to transform Sureserve into a smaller, more predictable business has paid off. The performance through the challenges of COVID-19 has demonstrated the resilience of the business. We had trimmed our 2020 revenue estimate from £210m to £201m, but the improving margins result in PBT being nudged up from £9.1m to £9.3m. The gradual re-rating of the shares this year suggests investors are starting to buy in to the turnaround and the improving market position.
Sureserve Group |
Improving market position |
Trading update |
General industrials |
7 October 2020 |
Share price performance
Business description
Next events
Analyst
Sureserve Group is a research client of Edison Investment Research Limited |
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Yesterday’s trading update confirmed the work management has undertaken to transform Sureserve into a smaller, more predictable business has paid off. The performance through the challenges of COVID-19 has demonstrated the resilience of the business. We had trimmed our 2020 revenue estimate from £210m to £201m, but the improving margins result in PBT being nudged up from £9.1m to £9.3m. The gradual re-rating of the shares this year suggests investors are starting to buy in to the turnaround and the improving market position.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/18 |
190.8 |
6.6 |
3.4 |
0.25 |
15.6 |
0.5 |
09/19 |
212.1 |
8.3 |
4.5 |
0.50 |
11.6 |
1.0 |
09/20e |
200.7 |
9.3 |
4.7 |
0.50 |
11.1 |
1.0 |
09/21e |
219.8 |
10.0 |
5.1 |
0.75 |
10.3 |
1.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strengthening market position
Sureserve is a market leader in social housing as compliance and its strong market position and balance sheet suggest it has a competitive advantage over some of its smaller, private competitors. The bidding team has been strengthened and the investment in training and apprentices to meet growing market opportunities are evidence of a strategy to gain market share. The order book was £375m at the end of September versus £324m at the end of May, when the group reported interims; we see this growth as evidence the strategy is delivering.
Net cash position of £3m at year-end
The trading statement highlighted the £3m net cash position at year-end, which excludes the deferred VAT payments. The prior year-end net debt position was £7.4m, thus a £10.4m inflow of cash has been achieved over the year. While the group is likely to remain cautious about the use of cash, if this becomes a regular feature we would expect firmer statements from the group about a progressive dividend policy and small bolt-on acquisitions.
Anticipating a positive start to the year
The gas compliance business is classified as an essential service and can continue operating through the lockdown. The improved margins in this part of the business have come from efficiencies as more people are at home and roads are less busy so it is easier to service clients. We expect some of this benefit to be reversed in 2021 and have modelled lower margins. With COVID-19 cases growing as we head into the winter, there is a reasonable prospect that with a continued lockdown, the gas compliance business may positively surprise on margins again.
Valuation: Sum-of-the-parts valuation of 67.5p
Our long-term valuation is based on a sum-of-the-parts model. This has increased slightly since we last published from 65p to 67.5p, with the improvement in net debt offset by slightly lower multiples from the peer group.
Exhibit 1: Financial summary
|
£m |
|
2017 |
2018 |
2019 |
2020e |
2021e |
||||||
30-September |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||||||
INCOME STATEMENT |
|||||||||||||
Revenue |
|
|
181.5 |
190.8 |
212.1 |
200.7 |
219.8 |
||||||
Cost of Sales |
(154.5) |
(163.4) |
(179.2) |
(167.2) |
(185.9) |
||||||||
Gross Profit |
27.0 |
27.4 |
32.9 |
33.5 |
33.9 |
||||||||
EBITDA |
|
|
9.0 |
9.2 |
10.5 |
15.2 |
15.2 |
||||||
Operating Profit (before amort. and except). |
|
|
7.4 |
8.0 |
9.4 |
10.0 |
10.4 |
||||||
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 |
9.8 |
||||||||
Net Interest |
(2.0) |
(1.5) |
(1.1) |
(0.7) |
(0.4) |
||||||||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||||||
Profit Before Tax (norm) |
|
|
5.4 |
6.6 |
8.3 |
9.3 |
10.0 |
||||||
Profit Before Tax (reported) |
|
|
(5.6) |
1.6 |
4.9 |
7.8 |
10.0 |
||||||
Reported tax |
0.9 |
(0.8) |
(1.2) |
(1.8) |
(1.9) |
||||||||
Profit After Tax (norm) |
6.4 |
5.8 |
7.1 |
7.5 |
8.1 |
||||||||
Profit After Tax (reported) |
(4.6) |
0.8 |
3.8 |
6.0 |
8.1 |
||||||||
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 |
7.5 |
8.1 |
||||||||
Net income (reported) |
0.0 |
(10.7) |
4.6 |
6.1 |
8.1 |
||||||||
Average Number of Shares Outstanding (m) |
157.5 |
157.5 |
158.0 |
159.1 |
159.4 |
||||||||
EPS (p) |
|
|
2.7 |
3.2 |
4.5 |
4.7 |
5.1 |
||||||
EPS - normalised (p) |
|
|
2.8 |
3.4 |
4.5 |
4.7 |
5.1 |
||||||
EPS - basic reported (p) |
|
|
0.0 |
(6.6) |
3.2 |
3.7 |
4.7 |
||||||
Dividend per share (p) |
0.50 |
0.25 |
0.50 |
0.50 |
0.75 |
||||||||
Revenue growth (%) |
(44.5) |
5.1 |
11.2 |
(5.4) |
9.5 |
||||||||
Gross Margin (%) |
14.9 |
14.3 |
15.5 |
16.7 |
15.4 |
||||||||
EBITDA Margin (%) |
5.0 |
4.8 |
4.9 |
7.5 |
6.9 |
||||||||
Normalised Operating Margin |
4.1 |
4.2 |
4.4 |
5.0 |
4.7 |
||||||||
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 |
51.0 |
51.8 |
||||||
Stocks |
4.5 |
4.2 |
3.1 |
2.9 |
3.2 |
||||||||
Debtors |
65.4 |
42.6 |
42.1 |
39.1 |
41.8 |
||||||||
Cash & cash equivalents |
26.1 |
1.7 |
2.5 |
9.0 |
3.3 |
||||||||
Other |
0.6 |
0.8 |
0.0 |
0.0 |
3.5 |
||||||||
Current Liabilities |
|
|
(72.0) |
(57.4) |
(37.4) |
(33.9) |
(39.2) |
||||||
Creditors |
(71.0) |
(39.3) |
(36.7) |
(29.9) |
(35.2) |
||||||||
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) |
(5.8) |
(1.8) |
||||||
Long term borrowings |
(27.2) |
(0.1) |
(9.8) |
(2.8) |
0.2 |
||||||||
Other long term liabilities |
(4.1) |
(2.9) |
(3.2) |
(3.0) |
(2.0) |
||||||||
Net Assets |
|
|
50.2 |
39.1 |
44.3 |
63.0 |
62.1 |
||||||
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||||||
Shareholders' equity |
|
|
50.2 |
39.1 |
44.3 |
63.0 |
62.1 |
||||||
CASH FLOW |
|||||||||||||
Op Cash Flow before WC and tax |
9.0 |
8.9 |
10.2 |
15.2 |
15.2 |
||||||||
Working capital |
5.7 |
(6.4) |
(1.1) |
9.9 |
(8.2) |
||||||||
Exceptional & other |
(1.3) |
(8.2) |
(3.6) |
0.5 |
0.5 |
||||||||
Tax |
0.7 |
(0.2) |
(0.0) |
(1.8) |
(1.9) |
||||||||
Net operating cash flow |
|
|
14.0 |
(5.8) |
5.5 |
23.8 |
5.7 |
||||||
Capex |
(0.9) |
(0.4) |
(0.4) |
(1.0) |
(2.2) |
||||||||
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 |
16.7 |
(2.5) |
||||||||
Opening net debt/(cash) |
|
|
21.0 |
1.3 |
11.4 |
7.4 |
(9.4) |
||||||
FX |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||||||
Other non-cash movements |
0.0 |
(0.4) |
0.1 |
0.1 |
0.0 |
||||||||
Closing net debt/(cash) |
|
|
1.3 |
11.4 |
7.4 |
(9.4) |
(6.9) |
||||||
Closing total net debt/(cash) including lease liabilities |
|
1.6 |
11.6 |
7.5 |
(3.0) |
(0.5) |
|||||||
Source: Company data, Edison Investment Research
|
|
Research: Industrials
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