The biggest takeaway from Sureserve Group’s interim result was its strong cash performance in the first half, with net debt falling to £3.5m at end March (£12.9m at end March 2018). This sets a solid base for the group to ride out the disruption of the lockdown. Our focus is on the outlook, with H1 only having eight days of impact from the lockdown. We have reduced our estimates for FY20, with the bulk of the revenue cut from £230m to £210m being a £13m cut in the Energy Services division. The cut to PBT from £9.8m to £9.1m is less severe, reflecting the improving efficiency in the Compliance division and the cost mitigation efforts of the group. With the long-term investment themes of regulatory compliance and energy efficiency likely to stay in focus, we see solid support for the group’s business and our FY21 numbers reflect the start of a bounce back in activity.
The long-term drivers of the investment case are around growing regulatory compliance to make buildings safer and improved energy efficiency. We believe both of these will only get more focus in the aftermath of COVID-19. Operating in a fragmented industry, often against smaller, private and regional competitors, Sureserve is likely to emerge from this crisis with less competition. Its working capital and cash management have been excellent. The group has had a head start of focusing on efficiency as part of its turnaround strategy and the additional measures of furloughing staff and the board taking pay cuts should continue to protect profitability and importantly cash.
While we have cut estimates, we note that there remains a heightened level of uncertainty around our estimates. The group has exposure to activities in Scotland and Wales, and both are yet to provide visibility on when activity will resume. Our scenario analysis suggests FY20 EBITA could range from £9.4m to £10.5m; we are currently at £10m. We also see some upside risk to our FY21 estimates with our modelling of the ‘bounce’ erring on the side of caution. The £323.7m order book underpins activity, the uncertainty is how much of this gets deferred short-term.
Our long-term valuation is 66p based on a sum-of-the-parts valuation. The Compliance division multiple has been eroded back from 11.8x in our last note to 8.4x, reflecting the drop in peer Mears’ rating. Offsetting this are lower central costs and an improved net debt position.