Uncertainty ahead for Sureserve

Sureserve (SUR) is changing tack. The compliance and energy services group once dealt with fire systems, lift shafts, boilers, electricity meters, air hygiene – indeed, all things health and safety – in social housing and public buildings. However, it is now homing in on the energy market, with a focus on renewables. 

At the moment, Sureserve’s compliance arm accounts for roughly two-thirds of total revenue. Most invoices are paid by housing associations and local government, so the risk of bad debt is fairly low, and cash conversion is high. Compliance revenue – which comes from gas, fire, electrics, air, water and lifts – is still rising, up 18 per cent year on year. 

However, the group’s energy services division is growing faster, up 40 per cent compared with 2020. After seeking advice from a third-party consultant, Sureserve now wants to bolster its position as a heating and heating maintenance provider to the social housing sector in the UK through acquisitions and organic growth. 

Businesses in the group that don’t relate to social housing energy markets are being reviewed, and could be disposed of to raise extra money. Dividends have also been forfeited this year; the cash will instead be invested in “strategically enhancing acquisitions”. These will include “bolt-on” companies that support existing operations and businesses specialising in renewables.

On one level, Sureserve’s new strategy makes sense. The company wants to make the most of the UK’s energy transition agenda by providing energy efficiency services such as insulation, smart meters, electrical vehicle charging points, air source heat pumps and solar panels. Consensus estimates are optimistic, predicting that earnings per share will reach 8.72p by the year ended September 2023, up from 7.1p today. 

However, it is important to note that the dominant technology in renewables has yet to emerge. As a result, Sureserve risks wasting money on acquisitions that fail to take off. Chief executive Peter Smith acknowledged this, saying the company will “almost certainly” have to make a punt on some technology that goes wrong.

Given Sureserve’s slim profit margins (there is currently a 6 per cent Ebita margin on sales) this could be a risky proposition for investors – particularly when coupled with inflationary pressures and labour shortages. While Sureserve’s order book for 2022 is strong, therefore, and provides good visibility for the year ahead, the company’s longer term prospects remain cloudy. Hold. 

Last IC view: na