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Fulcrum at a turning point

Fulcrum Utility Services is building market share across the UK - profits should follow thereafter
February 9, 2012

Gas connections specialist Fulcrum Utility Services is part way through a turnaround that began in 2010 when the company was bought from National Grid by an active investment manager, Marwyn. The Marwyn team specialises in building businesses from scratch or putting life into stagnating firms through acquisitions or self-help. It claims a strong record, having been involved with the likes of Talarius, Melorio, Concateno, Advanced Computer Software and Entertainment One.

IC TIP: Buy at 18.5p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Turnaround plan under way
  • New contracts promise higher margins
  • Has a high-profile backer
Bear points
  • Delays in new contracts
  • Competes in a stagnant market

Fulcrum withered under National Grid's ownership as deregulation of its market eroded its monopoly position. When Marwyn bought it in 2010 its revenues were just £38m, compared with £211m in 2005. Marwyn brought in chairman Philip Holder and chief executive John Spellman, both of whom have 30 years experience in the utilities and energy sectors, to revitalise the business. Much of the time since then has been spent improving internal operations, cutting costs, running down legacy low-margin contracts and repositioning the business.

Fulcrum primarily supplies non-regulated gas connections, which means new or refurbished gas connections where the connection is more than 23cm long. It used to work mostly for gas suppliers, but increasingly its business is with the contractors to which suppliers outsource work. Fulcrum is well placed with its national footprint. Management also sees opportunities in transporting gas, multi-utility connections and smart metering services.

FULCRUM UTILITY SERVICES (FCRM)

ORD PRICE:18.5pMARKET VALUE:£28.5m
TOUCH:17-18.512-MONTH HIGH/LOW:19p14p
DIVIDEND YIELD:nilPE RATIO:6
NET ASSET VALUE:1pNET CASH:£11.3m

Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201137-9.8nanil
2012*46-2.9nanil
2013*616.73.2nil
% change+33---

Normal market size: 7,000

Market makers: 5

Beta: 0.2

*Cenkos Securities forecasts

Negotiations with new partners took longer than anticipated and this held back performance in the six months to end September when Fulcrum recorded a £3.8m pre-tax loss. Since then, terms have been agreed with partners including Carillion, McNicholas and Turriff, leaving Fulcrum set to build its market share. According to broker Edison Investment Research, the UK's gas connections market in 2009 was worth around £1.2bn a year, and Fulcrum's part of that is worth around £600m. Yet, with construction and housebuilding in the UK subdued, the market is not growing, so Fulcrum has to set about gaining market share.

Self-help plus the gradual completion of low-margin contracts helped gross profit margins grow from 26 per cent to 29 per cent in the first half of 2011-12. Broker Cenkos believes gross margins can widen to 39 per cent because Fulcrum's cost base should stay fairly stable even when revenues rise. By now, Fulcrum should be trading profitably in some months, leading to £6.7m pre-tax profit for the whole of 2012-13 (see table). That produces 3.2p of earnings, meaning the shares are rated on a PE ratio of less than six.

True, Fulcrum has no direct quoted competitor, but the London stock market's utilities sector is rated at almost 13 times earnings, while contractors such as Balfour Beatty and Carillion are rated at 14 times and 10 times, respectively.