Lighthouse – An ESG Centred Week

Published on 19 February 2020

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Industry insights: UK climate action UK climate action

As public pressure gathers pace, UK investors are increasingly focusing on sustainability and the government is starting to respond. Recent newsflow related to UK climate action includes:

  • At the start of February, Boris Johnson unveiled a policy to ban the sale of new petrol, diesel or hybrid vehicles from 2035 at the latest, brought forward from 2040. This was part of the launch event for the 2020 United Nations Climate Change conference (COP26), which will be hosted by the UK in Glasgow in November.
  • BP has vowed to cut its emissions to net zero, also by 2050; however, the company’s announcement on 12 February 2020 did not detail how it expects to meet this target.
  • On 17 February, as part of its strategy to diversify away from fossil fuels, Royal Dutch Shell announced an offtake for a 100-megawatt battery at Minety, Wiltshire to provide back-up electricity to the National Grid when supplies of wind and solar power dip and is sufficient to power 10,000 homes. The Chinese investment fund CNIC is financing and constructing the battery with completion expected this year. In February 2019 Shell New Energies bought Limejump, which manages and aggregates electricity from small third-party power assets, including batteries. A full list of Shell New Energies initiatives can be found here.
  • Ofgem, the UK government’s regulator for gas and electricity markets, published its ‘decarbonisation action plan’ on 3 February. It contains a radical framework outlining the measures the UK needs to take to meet the government’s net zero carbon emission target in 30 years’ time.

    Since 1990, the UK’s net carbon emissions have fallen by 40%, more than in any other advanced economy. Ofgem outlines the radical changes needed to get to zero, including the need for 10m cars to be electrified in the next decade and a fourfold increase in offshore wind generation, as well as electrification and/or hydrogen power networks to replace our domestic gas central heating systems. A radical shift in investment and a concerted effort by the government, industry, investors and consumers will clearly be needed. Energy storage is seen as central to driving the reduction in greenhouse emissions.

    Batteries will play a critical role in the decarbonisation of the transport and power industries and investors have numerous options to play this growth in the automotive, chemical/industrial, transport and electricity sectors. Edison published a related thematic report in December Battery charge: The rise of lithium-ion – options and implications. We see scale and process improvements driving down battery manufacturing costs over the next decade, but we expect the bulk of the performance gains to come from improved chemistry. The note also looks at the different ways investors might play the battery theme.


    We highlight a couple of stocks under Edison research coverage that are trading at attractive valuations and have sustainability elements: Sureserve Group is a UK small cap while PIERER Mobility is a European mid cap.

    Sureserve Group (SUR LN/AIM/£74m) – Well positioned for clean growth strategy
    Sureserve Group is engaged in the provision of Compliance and Energy Services through two divisions, focused on customers in the outsourced public and regulated services sectors in the UK. It is the market leader in social housing gas compliance. The group itself is carbon neutral and there is increasing pressure on the UK government to follow a clean growth strategy, first outlined in legislation in 2017. Further development has been distracted by the politics of the last two years, but the UK government now has clean growth firmly on its agenda. Sureserve is well placed to enable the energy savings and efficiency measures to be implemented as part of the strategy.
    PIERER Mobility (KTMI/Six Swiss/Vienna/€1.04bn) – Pedal Power Combination.
    PIERER Mobility is a leading manufacturer of powered two wheelers (PTWs) focused on premium markets through the KTM, HUSQVARNA and GASGAS motorcycle brands. It looks set to add a new organic growth stream to its established track record as e-mobility markets continue to develop. The acquisition of the outstanding majority of PEXCO e-bikes and the development of new products focused on premium urban e-mobility markets addresses a new segment for the group, alongside continued expansion of the traditional core




Sureserve Stock Thesis

Investment case – ESG recovery play with defensive growth elements

Industry tailwinds:

Sureserve Group is engaged in the provision of Compliance and Energy Services through two divisions, focused on customers in the outsourced public and regulated services sectors in the UK. It is the market leader in social housing gas compliance. 100% of revenues are derived in the UK.

  • The UK government is targeting net zero carbon emissions by 2050, a key industry tailwind.
  • The Conservative Party’s manifesto pledged £6.3bn to improve energy efficiency in 2.2m disadvantaged households (£3.8bn for insulation and £2.5bn for upgrade grants eg boilers).
  • Ofgem’s”decarbonisation action plan” published in February 2020 has implications for gas central heating. Buildings emissions in the UK have remained stubbornly high compared to the relative success in reducing emissions in power generation.
  • The UK government will lead on these initiatives and Sureserve is well positioned to benefit given its position as a leading national brand with local government and local authorities.
  • Regulatory driven demand drivers
  • Fragmented and regional market provides opportunities for both organic and acquired growth

New management/turnaround:

  • Repositioned business model: Compliance and Energy Services – construction and property services divested in August 2018
  • New business model led to focus and strong period of contract wins (146 contracts worth £147.3m).
  • CFO Peter Smith, formerly at MITIE, joined in July 2019. Executive chairman, Bob Holt, assumed the departing COO’s duties from October 2019 and Christopher Mills was appointed a non-executive director (Christopher is the largest shareholder through Harwood).

Relatively defensive model:

  • Government-backed revenues: Framework contracts can last 10 years. In the UK, Sureserve has 96 frameworks worth £593m.
  • Visible earnings underpinned by the order book: Sureserve started FY20 with £333m committed, which covers c 72% of FY20 revenues, c 50% of FY21e revenues and c 25% of FY22e.
  • Relationships and brands create a barrier to entry that is built over many years with key procurers.


Thematic summary – Battery charge report

The abrupt fall in Chinese electric vehicle (EV) sales in Q3 has disrupted the lithium-ion battery supply chain and reset valuations. This gives investors the opportunity to reassess the long-term buy case. We believe batteries will play a critical role in the future of the transport and power industries. Investors have numerous options to play this growth in the automotive, chemical/industrial, transport and electricity sectors.

Likely winners

  • High-quality stocks continue to outperform and trade on a premium given potential trade deal uncertainties.
  • Short-term rally in rail, mail, water and energy stocks that risked nationalisation.
  • UK banks and asset managers, as the yield curve steepens and asset flows out of UK equities stop and become net inflows.
  • UK mid-cap stocks continue to outperform large-cap overseas earners.
  • House builders and infrastructure plays benefit from manifesto pledges.

Likely losers

  • Overseas earners or exporters with a UK listing, as sterling appreciates.

Winners and losers: the companies shown above do not translate into buys and sells as other themes (and valuation parameters) may conflict with this one.
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This week’s research
    • Company
    • Note Type
    • Price
    • Market Cap
  • Securities Trust of Scotland (STS) aims to generate income and long-term capital growth through a bottom-up approach to investing in global equities. The manager, Mark Whitehead, focuses on quality companies with an ability to sustain dividend growth, to build a relatively concentrated portfolio of 35–55 high-conviction stocks.
  • PDL BioPharma has a portfolio of healthcare-related assets. These include the Assertio royalty stream, covering rights for extended release (XR) formulations of metformin, a 29% stake in Evofem, a women’s health company on the brink of commercialization, and LENSAR, a femtosecond laser cataract surgery company.
  • Nanoco has announced that it has filed a patent infringement lawsuit against Samsung. The lawsuit alleges that Samsung has wilfully infringed the patents relating to Nanoco’s unique synthesis and resin capabilities for quantum dots.
  • Fidelity Asian Values (FAS) is managed by Nitin Bajaj. He employs a very disciplined process, seeking good businesses run by competent management, trading on attractive valuations. The polarisation in the stock market affords him many opportunities to invest in companies that fulfil his investment criteria.
  • Fittingly for a coloured gemstone company, Gemfields began trading on London’s AIM market on 14 February. We continue to see significant value in this stock, which was previously under the radar, and our updated sum-of-the-parts valuation is US$522m (previously US$449m)
  • BioPharma Credit (BPCR) has entered into a definitive agreement to provide US$165m in a single-tranche senior secured loan to Collegium Pharmaceutical, a Nasdaq-listed biopharmaceutical company, which currently markets an abuse-deterrent formulation of oxycodone (opioid) under the Xtampza brand, as well as Nucynta, a centrally acting synthetic analgesic.
  • Tinexta
  • Flash note
  • €12.56
  • €589m
  • Tinexta’s FY19 headline results are ahead of management guidance, with strong revenue growth in Digital Trust and Innovation & Marketing Services, and strong margin delivery in all business units. Guidance for FY20–22e highlights the continued strong underlying compound growth the group has historically produced.

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