UTW has developed a range of new strategic initiatives and set itself demanding targets for future growth. The plan will be implemented in the period FY18-21 and evidence of progress towards the targets will be required before any valuation uplift associated with this new growth trajectory is likely to be awarded. However, the current rating remains modest and we suggest it does not yet reflect the current prospects.
Written by
Utilitywise |
New initiatives and corporate targets |
Capital markets day |
Industrial support services |
3 March 2017 |
Share price performance
Business description
Next events
Analysts
Utilitywise is a research client of Edison Investment Research Limited |
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UTW has developed a range of new strategic initiatives and set itself demanding targets for future growth. The plan will be implemented in the period FY18-21 and evidence of progress towards the targets will be required before any valuation uplift associated with this new growth trajectory is likely to be awarded. However, the current rating remains modest and we suggest it does not yet reflect the current prospects.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
07/15 |
69.1 |
16.7 |
17.9 |
5.0 |
9.8 |
2.9 |
07/16 |
84.4 |
17.8 |
19.4 |
6.5 |
9.0 |
3.7 |
07/17e |
97.1 |
19.1 |
20.0 |
7.5 |
8.8 |
4.3 |
07/168e |
110.2 |
22.2 |
23.2 |
8.5 |
7.5 |
4.9 |
Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Priorities, initiatives and targets
At its capital markets day on 2 March 2017, UTW set out a number of new strategic initiatives and established targets for growth. “Optimising the Core” focuses on the approach to market (sales channels), improvements in the operating model and productivity, some of which is already evident (H117 order book +25%, headcount +7%). A “Digital Initiative” will seek to exploit the untapped market of 1.5m SME customers (84% of the market) that have never switched energy supplier. The “Multi-Utility” initiative is designed to allow businesses to manage all their interactions with utilities on a single platform (UTW’s research suggests that 70% of customers want a multi-utility service). The “Service Proposition” will seek to drive recurring revenue from developing customer service plans using UTW’s IoT “Wiselife” platform which is scheduled for rollout in the summer of 2017. “Energy Services” is seen as an opportunity for developing UTW’s internet-enabled control devices while “International Expansion” remains a medium-term objective.
Quantifying the targets
To monitor its progress UTW has set itself some challenging targets. UTW aims to increase SME customer numbers to 130,000 by July 2021, equivalent to a market share of 7% of the micro SME and SME market combined. To put these targets into context, UTW had 30,000 SME customers at the end of FY16 (c 2% of the market) and therefore UTW will need to achieve a CAGR in customer numbers of 33% in the period 2016-21. The target for revenue from the corporate energy controls of 5% (ie £75m), of the £1.5bn UK market by 2021, appear similarly ambitious.
Valuation: Current prospects not reflected
We leave our forecasts unchanged ahead of the interim figures. The market is likely to require UTW to demonstrate progress (expected to be non-linear) towards its long-term targets before awarding additional incremental valuation. However, we believe that the current rating of the shares appears undemanding (CY17e P/E of 8.2x) for a company with UTW’s financial record and prospect of continuing growth.
Exhibit 1: Financial summary
|
|
2014 |
2015 |
2016 |
2017e |
2018e |
31 July |
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
PROFIT & LOSS |
|
|
|
|
|
|
Revenue |
|
48,947 |
69,106 |
84,428 |
97,061 |
110,217 |
Cost of Sales |
|
(26,586) |
(38,810) |
(51,638) |
(58,237) |
(66,130) |
Gross Profit |
|
22,361 |
30,296 |
32,791 |
38,824 |
44,087 |
EBITDA |
|
14,467 |
17,785 |
18,268 |
19,424 |
22,247 |
Operating Profit (before amort and except) |
13,751 |
16,920 |
17,511 |
18,519 |
21,226 |
|
Intangible Amortisation |
|
(946) |
(1,297) |
(1,940) |
(1,963) |
(1,611) |
Exceptionals |
|
(22) |
(570) |
3,192 |
0 |
0 |
Share Based Payments |
|
(737) |
(695) |
(639) |
(756) |
(794) |
Other |
|
0 |
0 |
0 |
0 |
0 |
Operating Profit |
|
12,046 |
14,357 |
18,124 |
15,800 |
18,821 |
Net Interest |
|
(373) |
(235) |
289 |
628 |
947 |
Profit Before Tax (norm) |
|
13,379 |
16,685 |
17,799 |
19,147 |
22,172 |
Profit Before Tax (FRS 3) |
|
11,673 |
14,123 |
18,412 |
16,429 |
19,767 |
Tax |
|
(2,170) |
(2,927) |
(2,592) |
(3,286) |
(3,756) |
Profit After Tax (norm) |
|
11,208 |
13,758 |
15,208 |
15,862 |
18,417 |
Profit After Tax (FRS 3) |
|
9,503 |
11,196 |
15,821 |
13,143 |
16,012 |
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
72.5 |
75.3 |
77.4 |
78.1 |
78.1 |
|
EPS - normalised (p) |
|
15.4 |
18.3 |
19.7 |
20.3 |
23.6 |
EPS - normalised fully diluted (p) |
|
14.6 |
17.9 |
19.4 |
20.0 |
23.2 |
EPS - (IFRS) (p) |
|
13.0 |
14.9 |
20.5 |
16.8 |
20.5 |
Dividend per share (p) |
|
4.0 |
5.0 |
6.5 |
7.5 |
8.5 |
|
|
|
|
|
|
|
Gross Margin (%) |
|
45.7 |
43.8 |
38.8 |
40.0 |
40.0 |
EBITDA Margin (%) |
|
29.6 |
25.7 |
21.6 |
20.0 |
20.2 |
Operating Margin (before GW and except.) (%) |
28.1 |
24.5 |
20.7 |
19.1 |
19.3 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
Fixed Assets |
|
36,975 |
66,048 |
69,475 |
71,122 |
75,165 |
Intangible Assets |
|
21,926 |
37,171 |
34,234 |
32,272 |
30,660 |
Tangible Assets |
|
4,838 |
5,899 |
5,591 |
5,350 |
5,505 |
Investments & Other |
|
10,211 |
22,978 |
29,650 |
33,500 |
39,000 |
Current Assets |
|
30,436 |
23,075 |
33,200 |
40,362 |
44,201 |
Stocks |
|
98 |
643 |
559 |
630 |
715 |
Debtors |
|
13,958 |
15,939 |
19,657 |
23,500 |
26,685 |
Cash |
|
15,823 |
6,492 |
12,985 |
16,232 |
16,800 |
Other |
|
557 |
0 |
0 |
0 |
0 |
Current Liabilities |
|
(18,315) |
(18,420) |
(23,495) |
(23,110) |
(25,750) |
Creditors |
|
(18,315) |
(18,420) |
(23,495) |
(23,110) |
(25,750) |
Short term borrowings |
|
0 |
0 |
0 |
0 |
0 |
Long Term Liabilities |
|
(15,494) |
(24,581) |
(19,791) |
(20,942) |
(16,015) |
Long term borrowings |
|
(6,000) |
(13,175) |
(13,175) |
(13,175) |
(7,175) |
Other long term liabilities |
|
(9,494) |
(11,406) |
(6,616) |
(7,767) |
(8,840) |
Net Assets |
|
33,602 |
46,121 |
59,389 |
67,432 |
77,600 |
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
Operating Cash Flow |
|
11,615 |
(2,537) |
12,487 |
11,918 |
16,675 |
Net Interest |
|
(373) |
(250) |
(434) |
628 |
947 |
Tax |
|
(1,910) |
(2,208) |
(1,814) |
(3,286) |
(3,756) |
Capex |
|
(631) |
(1,897) |
(786) |
(665) |
(1,175) |
Acquisitions/disposals |
|
(835) |
(6,398) |
0 |
0 |
0 |
Financing |
|
101 |
149 |
1,258 |
0 |
0 |
Dividends |
|
(2,158) |
(3,365) |
(4,218) |
(5,349) |
(6,122) |
Net Cash Flow |
|
5,810 |
(16,506) |
6,492 |
3,247 |
6,569 |
Opening net debt/(cash) |
|
(4,013) |
(9,823) |
6,683 |
190 |
(3,057) |
HP finance leases initiated |
|
0 |
0 |
0 |
0 |
0 |
Other |
|
0 |
0 |
0 |
0 |
0 |
Closing net debt/(cash) |
|
(9,823) |
6,683 |
190 |
(3,057) |
(9,625) |
Source: Edison Investment Research
|
|