Sureserve Group — Interims reflect a more predictable business

Sureserve Group (LN: SUR)

Last close As at 27/03/2024

GBP0.92

0.50 (0.55%)

Market capitalisation

GBP148m

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Research: Industrials

Sureserve Group — Interims reflect a more predictable business

Given the pre-restructuring history of Sureserve, the absence of any surprises or exceptionals in this set of interims is a cause for celebration. The more streamlined group is now focused on compliance and energy services, where growth is underpinned by regulatory drivers. H119 results showed revenues expanding by 13% y-o-y and EBITDA growing by 17%. The current FY19e P/E of 7.1x is in marked contrast to the 15.5x recently offered by Macquarie for PTSG, one of Sureserve’s peers, and highlights the relative attraction of the business.

Written by

Neil Shah

Industrials

Sureserve Group

Interims reflect a more predictable business

Interim results

Industrial support services

26 June 2019

Price

28.2p

Market cap

£45m

Net debt (£m) at 31 March 2019

12.9

Shares in issue

157.5m

Free float

95%

Code

SUR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.1

(1.1)

(33.7)

Rel (local)

2.3

(4.2)

(32.1)

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

Trading update

September 2019

FY19 results

January 2020

Analysts

Neil Shah

+44 (0)20 3077 5715

Stephen Rawlinson

+44 (0)20 3077 5700

Sureserve Group is a research client of Edison Investment Research Limited.

Given the pre-restructuring history of Sureserve, the absence of any surprises or exceptionals in this set of interims is a cause for celebration. The more streamlined group is now focused on compliance and energy services, where growth is underpinned by regulatory drivers. H119 results showed revenues expanding by 13% y-o-y and EBITDA growing by 17%. The current FY19e P/E of 7.1x is in marked contrast to the 15.5x recently offered by Macquarie for PTSG, one of Sureserve’s peers, and highlights the relative attraction of the business.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

181.5

5.4

2.8

0.50

10.1

1.8

09/18

190.8

6.6

3.4

0.25

8.3

0.9

09/19e

205.2

7.7

4.0

0.25

7.1

0.9

09/20e

215.6

8.3

4.3

0.25

6.6

0.9

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.

Estimates largely unchanged, but scope for upside

Our EPS estimates are unchanged for 2020, but tweaked up from 3.9p to 4.0p for FY19 following the interims. The business is seasonal in nature and H2 has a greater contribution to profitability as there are fewer callouts in the summer. Our FY19 EBITA estimate is virtually unchanged at £8.8m and is roughly in line with the c £9m management is targeting. We expect net debt to fall as the group is expecting an 80% cash conversion (underlying EBITA to operating cash flow) for the full year and at present believe shareholders prefer debt to be paid down instead of dividend income.

Attractive market positions delivering growth

The compliance and energy services businesses have strong market positions. Gas compliance has a market-leading position in public work and is likely to benefit from the consolidation in housing associations and the allocation of council budgets from maintenance to safety. Energy services has seen growth driven by smart metering and energy efficiency contract wins, and should see the benefit of the £55m Arbed 3, which has been mobilised and is now due to contribute profitably for H219.

New finance director appointed

Peter Smith (ex-Mitie) has been announced as the new finance director and will join the company on 29 July 2019. This will allow Michael McMahon more bandwidth on developing the business and should allow more focus on narrowing the gap in fundamentals the group’s valuation.

Valuation: Undemanding multiple given stability

Management is growing the business successfully and sensibly. However, the share price has yet to reflect this. The P/E multiple is around 7x for both FY19e and FY20e and is at odds with the more stable business into which Sureserve has transformed itself.

Exhibit 1: Financial summary

 

£m

 

2017

2018

2019e

2020e

30-September

 

 

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

181.5

190.8

205.2

215.6

Cost of Sales

(154.5)

(163.4)

(177.1)

(186.9)

Gross Profit

27.0

27.4

28.1

28.7

EBITDA

 

 

9.0

9.2

11.6

10.9

Operating Profit (before amort. and except).

 

7.4

8.0

8.8

9.4

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(11.0)

(4.6)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

Reported operating profit

(3.6)

3.4

8.8

9.4

Net Interest

(2.0)

(1.5)

(1.1)

(1.0)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

5.4

6.6

7.7

8.3

Profit Before Tax (reported)

 

 

(5.6)

1.6

6.0

7.9

Reported tax

0.9

(0.8)

(1.5)

(1.6)

Profit After Tax (norm)

6.4

5.8

6.3

6.7

Profit After Tax (reported)

(4.6)

0.8

4.5

6.3

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

4.6

(11.5)

0.0

0.0

Net income (normalised)

6.4

5.8

6.3

6.7

Net income (reported)

0.0

(10.7)

4.5

6.3

Average Number of Shares Outstanding (m)

157.5

157.5

157.5

157.5

EPS (p)

 

 

2.7

3.2

4.0

4.3

EPS - normalised (p)

 

 

2.8

3.4

4.0

4.3

EPS - basic reported (p)

 

 

0.0

(6.6)

4.0

4.3

Dividend per share (p)

0.50

0.25

0.25

0.25

Revenue growth (%)

(44.5)

5.1

7.6

5.0

Gross Margin (%)

14.9

14.3

13.7

13.3

EBITDA Margin (%)

5.0

4.8

5.6

5.0

Normalised Operating Margin

4.1

4.2

4.3

4.3

BALANCE SHEET

Fixed Assets

 

 

57.0

50.2

48.4

48.0

Intangible Assets

51.4

47.9

46.1

45.7

Tangible Assets

1.9

1.5

1.5

1.5

Investments & other

3.7

0.9

0.9

0.9

Current Assets

 

 

96.6

49.3

56.5

63.2

Stocks

4.5

4.2

4.5

4.8

Debtors

65.4

42.6

46.2

48.5

Cash & cash equivalents

26.1

1.7

5.8

9.9

Other

0.6

0.8

0.0

0.0

Current Liabilities

 

 

(72.0)

(57.4)

(56.9)

(56.9)

Creditors

(71.0)

(39.3)

(41.0)

(41.0)

Tax and social security

0.0

0.0

(0.3)

(0.3)

Short term borrowings

(0.2)

(13.0)

(13.0)

(13.0)

Other

(0.9)

(5.1)

(2.6)

(2.6)

Long Term Liabilities

 

 

(31.3)

(3.0)

(3.0)

(3.0)

Long term borrowings

(27.2)

(0.1)

(0.1)

(0.1)

Other long-term liabilities

(4.1)

(2.9)

(2.9)

(2.9)

Net Assets

 

 

50.2

39.1

44.9

51.2

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

50.2

39.1

44.9

51.2

CASH FLOW

Op Cash Flow before WC and tax

9.0

8.9

11.6

10.9

Working capital

5.7

(6.4)

(5.6)

(2.5)

Exceptional & other

(1.3)

(8.2)

1.6

0.1

Tax

0.7

(0.2)

(1.5)

(1.6)

Net operating cash flow

 

 

14.0

(5.8)

6.1

6.8

Capex

(0.9)

(0.4)

(1.0)

(1.1)

Acquisitions/disposals

9.1

(1.7)

(0.6)

0.0

Net interest

(1.4)

(1.1)

(1.1)

(1.1)

Equity financing

0.0

0.0

0.0

0.0

Dividends

(0.8)

(0.8)

(0.4)

(0.4)

Other

(0.3)

(0.0)

(0.3)

(0.0)

Net Cash Flow

19.8

(9.8)

2.7

4.3

Opening net debt/(cash)

 

 

21.0

1.3

11.4

7.4

FX

0.0

0.0

1.5

0.0

Other non-cash movements

0.0

(0.3)

(0.3)

(0.1)

Closing net debt/(cash)

 

 

1.3

11.4

7.4

3.2

Source: Company accounts, Edison Investment Research

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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This report has been commissioned by Sureserve GroupSureserve Group and prepared and issued by Edison, in consideration of a fee payable by Sureserve GroupSureserve 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.

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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