Sureserve Group — Full-year results give confidence

Sureserve Group (LN: SUR)

Last close As at 27/03/2024

GBP0.92

0.50 (0.55%)

Market capitalisation

GBP148m

More on this equity

Research: Industrials

Sureserve Group — Full-year results give confidence

FY18 was a year of transition for Sureserve, as it divested its Contracts and Property maintenance operations to focus on Compliance and Energy support services. The prospective P/E of 6.7x warrants investor attention. The investment thesis is that the group will continue to benefit from being more focused, its remaining divisions have strong regulatory drivers underpinning revenue growth, and there remains potential to improve margins and scope for growth through consolidating a fragmented industry. The outlook statement references a strong order book and a strong start to FY19, performing ahead of management expectations.

Written by

Neil Shah

Industrials

Sureserve Group

Full-year results give confidence

Full-year results

Industrial support services

24 January 2019

Price

26.3p

Market cap

£41m

Net debt (£m) as at 30 September 2018

11.4

Shares in issue

157.5m

Free float

95%

Code

SUR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

28.1

(27.1)

(31.8)

Rel (local)

24.8

(26.2)

(23.2)

52-week high/low

44.2p

20.0p

Business description

Sureserve is engaged in the asset and energy support services business, focused on customers in the outsourced public and regulated services sectors in the UK. It comprises two divisions: compliance and energy services.

Next events

AGM

March 2019

Interims

July 2019

Analysts

Neil Shah

+44 (0)20 3077 5715

Toby Thorrington

+44 (0)20 3077 5721

Sureserve Group is a research client of Edison Investment Research Limited

FY18 was a year of transition for Sureserve, as it divested its Contracts and Property maintenance operations to focus on Compliance and Energy support services. The prospective P/E of 6.7x warrants investor attention. The investment thesis is that the group will continue to benefit from being more focused, its remaining divisions have strong regulatory drivers underpinning revenue growth, and there remains potential to improve margins and scope for growth through consolidating a fragmented industry. The outlook statement references a strong order book and a strong start to FY19, performing ahead of management expectations.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

181.5

5.4

2.8

0.50

9.4

1.9

09/18

190.8

6.6

3.4

0.25

7.7

1.0

09/19e

202.3

7.7

3.9

0.50

6.7

1.9

09/20e

212.5

8.3

4.3

0.75

6.1

2.9

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. 2017 and 2018 EPS reflects a notional 19% tax charge.

FY18 operational review

The two areas of the business are well established in their fields. The Energy operation is based on the Everwarm operations and has had some notable contract successes, including the £55m Arbed 3 contract won in May last year. The Compliance operations won a £44m framework from Aberdeenshire Council. Overall the business is on 108 frameworks with a value of £633m and has maintenance contracts worth £399m. The company has also made a meaningful investment in building its capability in smart meter installation and is ready for the next phase of the roll out of that programme; it may seek a vehicle to fund meter investments.

Earnings should improve in FY19

Earnings should improve in FY19 as a result of better margins that were below the target levels in FY18 due to the developments in the group. Group normalised operating profit margins of 5% might be a realistic target.

Balance sheet looks comfortable

The balance sheet shows net debt of £11.4m at the period end, which was in part due to the exit costs from the discontinued operations; average net debt was £18.7m, which was well below the prior year level of £27.3m. There is still some deferred consideration liability but, at £0.3m, it is low. The legacy discontinued operations have a £4.5m provision until a few retained projects are completed.

Valuation: Undemanding rating

The company is now restructured and ready to grow; the space in which it operates is in consolidation mode and most activities are essential and legislation driven. The prospects are not reflected in the share price, in our view. Peers Marlowe and PTSG trade on prospective P/Es of 22.1x and reflect the potential upside path.

Exhibit 1: Financial summary

 

 

£m

2016

2017

2018

2019e

2020e

Year end 30 September

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

299.1

181.5

190.8

202.3

212.5

Cost of Sales

(265.4)

(154.5)

(163.4)

(174.3)

(183.8)

Gross Profit

33.8

27.0

27.4

28.0

28.7

EBITDA

 

 

10.2

9.0

9.2

10.1

10.8

Operating Profit (before amort. and except).

 

8.5

7.4

8.0

8.7

9.4

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

(42.6)

(11.0)

(4.6)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

Reported operating profit

(34.0)

(3.6)

3.4

8.7

9.4

Net Interest

(1.0)

(2.0)

(1.5)

(1.0)

(1.0)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

(0.6)

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

7.5

5.4

6.6

7.7

8.3

Profit Before Tax (reported)

 

 

(35.7)

(5.6)

1.6

7.2

7.9

Reported tax

4.5

0.9

(0.8)

(1.5)

(1.6)

Profit After Tax (norm)

6.3

6.4

5.8

6.2

6.7

Profit After Tax (reported)

(31.1)

(4.6)

0.8

5.8

6.3

Minority interests

0.0

0.0

0.0

0.0

0.0

Discontinued operations

1.9

4.6

(11.5)

0.0

0.0

Net income (normalised)

6.3

6.4

5.8

6.2

6.7

Net income (reported)

(29.3)

0.0

(10.7)

5.8

6.3

Average Number of Shares Outstanding (m)

157.5

157.5

157.5

157.5

157.5

EPS - normalised fully diluted (p)

 

 

5.1

2.7

3.2

3.8

4.1

EPS - normalised (p)

 

 

5.2

2.8

3.4

3.9

4.3

EPS - basic reported (p)

 

 

(18.6)

0.0

(6.6)

3.9

4.3

Dividend per share (p)

1.50

0.50

0.25

0.50

0.75

Revenue growth (%)

(3.8)

(44.5)

5.1

6.1

5.0

Gross Margin (%)

11.3

14.9

14.3

13.9

13.5

EBITDA Margin (%)

3.4

5.0

4.8

5.0

5.1

Normalised Operating Margin

2.9

4.1

4.2

4.3

4.4

BALANCE SHEET

Fixed Assets

 

 

74.2

57.0

50.2

49.8

49.3

Intangible Assets

69.3

51.4

47.9

47.4

47.0

Tangible Assets

2.8

1.9

1.5

1.5

1.5

Investments & other

2.1

3.7

0.9

0.9

0.9

Current Assets

 

 

75.4

96.6

49.3

54.0

60.0

Stocks

5.2

4.5

4.2

4.5

4.7

Debtors

68.8

65.4

42.6

45.5

47.8

Cash & cash equivalents

0.0

26.1

1.7

4.0

7.5

Other

1.5

0.6

0.8

0.0

0.0

Current Liabilities

 

 

(68.7)

(72.0)

(57.4)

(56.4)

(56.3)

Creditors

(66.5)

(71.0)

(39.3)

(40.5)

(40.4)

Tax and social security

0.0

0.0

0.0

(0.3)

(0.3)

Short term borrowings

(0.3)

(0.2)

(13.0)

(13.0)

(13.0)

Other

(1.9)

(0.9)

(5.1)

(2.6)

(2.6)

Long Term Liabilities

 

 

(30.0)

(31.3)

(3.0)

(3.0)

(3.0)

Long term borrowings

(20.8)

(27.2)

(0.1)

(0.1)

(0.1)

Other long term liabilities

(9.2)

(4.1)

(2.9)

(2.9)

(2.9)

Net Assets

 

 

51.0

50.2

39.1

44.4

49.9

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

51.0

50.2

39.1

44.4

49.9

CASH FLOW

Op Cash Flow before WC and tax

(1.7)

9.0

8.9

10.1

10.8

Working capital

(1.2)

5.7

(6.4)

(4.3)

(2.5)

Exceptional & other

(2.4)

(1.3)

(8.2)

1.5

0.1

Tax

(0.3)

0.7

(0.2)

(1.5)

(1.6)

Net operating cash flow

 

 

(5.7)

14.0

(5.8)

6.0

6.8

Capex

(0.8)

(0.9)

(0.4)

(1.0)

(1.1)

Acquisitions/disposals

(17.8)

9.1

(1.7)

(0.6)

0.0

Net interest

(0.8)

(1.4)

(1.1)

(1.1)

(1.1)

Equity financing

0.0

0.0

0.0

0.0

0.0

Dividends

(4.6)

(0.8)

(0.8)

(0.8)

(1.2)

Other

(0.4)

(0.3)

(0.0)

(0.0)

(0.0)

Net Cash Flow

(30.0)

19.8

(9.8)

2.5

3.5

Opening net debt/(cash)

 

 

(6.2)

21.0

1.3

11.4

9.1

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

2.8

0.0

(0.3)

(0.2)

(0.1)

Closing net debt/(cash)

 

 

21.0

1.3

11.4

9.1

5.7

Source: Sureserve accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Sureserve Group and prepared and issued by Edison, in consideration of a fee payable by Sureserve Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

General disclaimer and copyright

This report has been commissioned by Sureserve Group and prepared and issued by Edison, in consideration of a fee payable by Sureserve Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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