Tuesday saw UK services group Sureserve (LSE:SUR) jump 8% to 47p, its highest share price since May 2017, following the release of a robust set of results for the year ended 30 September 2019. The company was able to beat both market and internal forecasts thanks to strong performance across its compliance and energy services divisions in spite of severe UK trading conditions. With Sureserve claiming that it is on track to sustain last year’s growth in its current financial year, we have taken a look at where the organisation’s share price could head next.
Major public sector player
Based in Basildon, Sureserve is a leading UK compliance and energy services group with a particularly significant focus on homes and buildings in the UK public sector – where it generates around 98% of its revenues. Having divested its construction and property services arms, 2019 marked the first year that the firm’s operations split between just two divisions- compliance and energy services.
Within its compliance arm, Sureserve’s six subsidiaries perform either gas compliance functions (such as installing boilers in social housing) or building compliance activities (like monitoring lifts and water hygiene). Meanwhile, the company’s two energy services businesses carry out functions such as installing smart meters and energy saving devices predominantly in social housing and public sector buildings.
In its latest results, Sureserve said it believes it is now the leading provider of gas installation and maintenance services to the public sector. Its figures appear to back this up.
In a year that saw it continue to deliver on a key contract with the Scottish government until 2022 and secure an Octopus Energy smart meter deal worth up to £9.4 million, Sureserve’s revenue rose 11% year-on-year to £212.1 million. Meanwhile, its operating profit before exceptional items and amortisation of acquisition intangibles rose 16% to £9.4 million, and its operating cash conversion soared from 60% to 106%.
Digging deeper, the company’s compliance arm – which accounts for around two-thirds of EBITDA – saw revenues jump 14% thanks to new contracts, relationship extensions, and regulatory-driven improvements. Meanwhile, margins in its energy services division were enhanced through efficiencies and commercial negotiation despite small hits in areas like insulation and meter installation due to sector-specific issues.
According to Sureserve, its figures surpassed both the market’s forecasts and its internal predictions. Chief financial officer Peter Smith puts this mainly down to the organisation’s strong reputation, which boosts customer retention rates and rewards it with repeat business:
“I think our existing customers see us as being the market leaders in what we do, so they give us more and more work. Particularly around the gas businesses, we will win work to install a certain number of boilers, for example, then we will get more service and repair work off the back of this. Installation is often less lucrative than the service and repair work, so knowing that you have continued agreements that is a big driver of performance,” he told us. “We did very well in winning more contracts last year, but the thing I noticed throughout and to this day is that we are winning small amounts of incremental work with existing customers.”
Another high point of Sureserve’s results for investors was the firm’s proposed 0.5p full-year dividend, a 100% increase on its 2018 dividend. Meanwhile, the firm reduced its net debt to £7.4 million from £11.4 million at the end of the previous year and decreased the amount drawn from its revolving credit facility from £13 million to £10 million. Since the end of the results period, this final figure has dropped yet further to around £7.5 million. Smith tells us that Sureserve has every intention of continuing to make progress on all of these fronts:
“We have not set a specific process around dividends, but it is our intention to continue paying one and this will be based on earnings. Likewise, I am relentless when it comes to reducing our net debt and the amount drawn down from our credit facility, completing cash calls every fortnight and maintaining a 12-week rolling cash forecast. I see no reason to change this moving forward.”
Looking to the future
Critically, Sureserve used its results as an opportunity to assure investors that its strong performance can continue moving forward. The business was participating in a total of 96 frameworks worth a total of £592.7 million at year-end and had 144 maintenance contracts in place worth a total of £409.6 million. This provides it with strong earnings visibility through 2020, with 72% of full-year earnings covered by an order book worth £333.2 million.
As a result, Peel Hunt issued a strong broker note in response to the results, announcing that it expects Sureserve’s net debt to fall to £3 million in FY20E, allowing the company to move into a net cash position in FY21E. Meanwhile, the broker said the firm’s shares were “attractively valued” and increased its short-term target price to 50p to reflect “operational momentum”. For his part, Smith is confident that Sureserve can meet the high expectations being placed on it in the market, with the current financial year already getting off to a great start:
“Our growth trajectory has been continuing into the current year, and we expect growth to stay at a healthy rate well beyond 2020. We already know that 72% of the revenues for 2020 are secured. We are on the best part of £600 million of frameworks, and we have around 140 long-term maintenance contracts with work coming through those.
“We have a pretty decent idea already of where we are going to be from a revenue perspective and know our cost base well. Looking at what the budgets are like for 2020, we really should be in a strong place. I see absolutely no reason why we shouldn’t continue growing and market forecasts indicate this is achievable. We are established, we have a good reputation, we are winning lots of incremental work, we are on lots of frameworks. The first quarter’s trading is telling me that as well.”
Finally, from a macro perspective, Smith tells us that Sureserve’s public sector focus means it is broadly shielded from the Brexit-driven pessimism that continues to slow the UK economy. He argues that Boris Johnson’s victory in the recent General Election could even prove to be a boon for the organisation, with the Prime Minister frequently citing plans to increase social housing and ending fuel poverty:
“The public sector must continue providing social housing and the compliance required. So actually, the ongoing, difficult trading environment does not affect us. We are well equipped to meet the government’s needs surrounding their social housing expansion plans. Over the long-term, England does not currently have an energy-saving strategy in the same way as Scotland and Wales, but when they decide they do need one we are well-positioned to be at the top of the queue.”
An investment opportunity?
Since releasing its results, Sureserve’s share price has come off slightly, currently sitting at 43p to give the business a market cap of £68.7m. If the company can deliver on its plans to continue growing, cutting debt, and increasing dividends for shareholders, then it stands a good chance of hitting the market’s short-term target of around 50p.
An important factor here will continue to be the firm’s ability to mostly avoid broader trading concerns across the UK due to its involvement primarily in the public sector. If this momentum can continue beyond the firm’s current financial year, then those who enter now to hold over the long-term could be rewarded.