Sureserve continues to demonstrate it has a de-risked business and the ability to deliver growth and cash generation from its two core divisions. The recent announcements affirming end FY19 net-debt of £7.6m, FY19 earnings guidance to meet expectations and the pay down of the revolving credit facility all provide comfort that the more focused group is performing well. Our previous earnings were marginally below consensus and we are raising FY19 and FY20 PBT estimates from £7.7m and £8.3m to £8.1m and £8.6m, respectively. The valuation at 7.2x current year earnings suggests the market still has to reprice the lower risk to earnings and start to differentiate the attractive gas compliance and energy services operations from the more out of favour construction services sector.
The year-end trading update confirmed the business was in line with expectations in the year ending 30 September. Net debt at the year-end was £7.6m, which is in line with the £7.4m we had forecast. £4.0m of the revolving credit facility (RCF) has been repaid and currently around £10.0m is used for trading. Net debt was £12.9m at end March 2019 and £14.2m a year earlier, reflecting the improving cash generation of the more simplified business. Around £0.9m was received post year end from the buyer of Orchard Energy Services, a non-core energy consulting operation sold in late 2017.
Sureserve’s two mainstream operations are in attractive areas and performing well with good recent track records of winning work. Compliance activities are currently mainly in gas services to the social housing sector, driven mainly by legislation. The increasingly national coverage allows the business economies of scale and it can benchmark across its regions, which improves efficiency. Energy services has a similar customer base as compliance and its activities are underpinned by longterm contracts with the Scottish and Welsh governments (Warmworks and Arbed). The order book was £350m at end March 2019, equal to over 18 months’ revenue and it is growing.
Our sum of the parts valuation suggests an EV of c £79m compared to the current c £55m, which would imply a 45p share price. The sum of the parts also highlights the drag central costs have on the value of the group and should be a focus for management and shareholders alike.