The current fuel crisis has highlighted the need for the UK to become more energy efficient. The meter, you might say, is ticking.
Sureserve Group, a compliance and energy services group focused on UK customers in the outsourced public and regulated services sectors, looks well placed to benefit from the increased interest in insulation, heat pumps, battery storage, solar power and the like.
Founded in 1988 and headquartered in Dartford, Kent, it currently employs some 2,588 staff from 28 offices across the UK and claims to be the market leader in several social housing energy services markets.
Sureserve has bagged contracts worth nearly £100m with social housing providers in London
Sureserve has fingers in many pies: social housing, education, public buildings, the energy sector and industrial & commercial enterprises.
The emphasis on energy efficiency is very much with the zeitgeist.
The compliance arm, which is the largest provider of social housing gas testing in the UK, contributes around two-thirds of group revenues while the Energy Services arm chips in with the rest of the revenues and is actually the faster-growing part of the business.
In the year to the end of September 2021, Compliance revenues grew by 18 per cent and underlying earnings (EBITA) by 18 per cent and 17.4 per cent respectively year-on-year.
Energy Services grew revenue by 40 per cent and EBITA by 325 per cent from the year before.
Since taking the chair in May of last year Nick Winks has led a review of the group’s operations and come up with a strategy that envisages augmenting organic growth with bolt-on acquisitions in the gas heating and maintenance sector and strategic acquisitions in the renewable technologies field.
‘Our strategy is to build upon our strength as a heating, and heating maintenance provider to the social housing sector in the UK.
‘We estimate that, with about 9 per cent of this £2billion annual market, we are already a leading provider.
‘Our ambition is to double our sales and significantly improve our net margin and earnings per share within the next five years,’ he said in the group’s full-year results statement issued back in January.
Since then, the group has set about making good on this ambition, bagging a 10-year £20million contract win with Tower Hamlets Homes in February and an eight-year contract extension worth £68million with L&Q, a provider of social housing that owns and manages more than 95,000 homes across London and South- East.
To put those contract wins into context, revenue in the six months to the end of March was £126million, up 24 per cent from the £102million in the corresponding period 12 months earlier.
The order book from continuing operations at the end of March stood at £512million, up 50 per cent from 12 months earlier and the company revealed that 96 per cent of expected revenue in the 12 months to the end of September is covered by the order book.
Half-year profit from operations rose by just over a third to £4.3million from £3.2million the year before while the company is debt-free with net cash, excluding lease liabilities, at the end of March of £11.8million, up from £9.7million at the end of March 2021.
This is not a company for income investors, however, as the company has binned dividends for the time being, preferring to plough cash back into the business to drive its growth plans.
Another possible red flag for investors is cost increases but the group is not alone in facing these and claims to have put measures in place to minimise the impact.
Only two brokers follow the stock – Peel Hunt and house broker Shore Capital – and both rate the shares a ‘buy’, with a mid-range target price of 121p compared to the current share price of around 82.5p.
‘Given Sureserve’s earnings quality and long-term growth prospects – enhanced by the recent growth strategy – we believe the valuation is compelling,’ Shore Cap said, citing a price that is barely more than 10 times projected earnings per share for the current financial year.
Peel Hunt says the stock continues to offer ‘significant value given potential for double-digit organic growth in our view, supplemented by M&A [mergers & acquisitions] given the company’s cash resources and FCF [free cash flow]’.
The company has high revenue visibility from long-term, regulatory-led local authority and housing association contracts.
Leadership positions in non-volatile markets with recurring, predictable revenues should ensure long-term sustainable growth while the sizzle should come from consolidation opportunities in what is a highly fragmented and regional market.
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