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Sureserve faces margin squeeze

Higher labour and materials costs may not be fully recovered
Sureserve faces margin squeeze
  • Contracts allow for uplift based on RPI or CPI
  • Order book jumps by 50 per cent to £512mn

Sureserve (SUR) is a vehicle with many moving parts. It has been buying and selling companies for the past five years as it transforms from a construction and property services business into a provider of heating and energy services to social housing landlords. 

As a consequence, this year’s results are presented against restated figures for last year, to account for the fact that two subsidiaries testing lifts and fire and electrical equipment have been put up for sale.

It also added CorEnergy – an energy efficiency business focused on renewals – in December for £7.5mn. 

Given that it pumped in an initial £3.3mn in cash to fund the purchase and another £1mn in working capital, its closing cash balance (excluding leases) of £11.8mn – up from £9.7mn a year earlier, but down from £16.4mn at its year end – was seen as a positive by chief executive Peter Smith.

Its operating margin also edged up to 3.7 per cent, from 3.5 per cent a year earlier, but “there will be some pressure on margins in the second half” from higher materials and labour costs, Smith said.

Its contracts with local authorities and housing associations allow for an annual uplift, but this is based either on retail (RPI) or consumer price inflation (CPI).

“Given the challenges we have with inflation at the moment, there will be examples where our costs are outstripping RPI or CPI,” he said. 

Sureserve manages to pass on “about half” of all increases through negotiations with clients and does what it can to mitigate the rest.

A 50 per cent uplift in its order book to £512mn provides good visibility over revenue, but the prospect of its thin margins shrinking further gives little incentive to buy the shares – even at a fairly attractive valuation of 10.2 times Shore Capital's forecast earnings of 8.1p. Hold.

Last IC View: Hold, 92p, 26 Jan 2022

SURESERVE (SUR)   
ORD PRICE:83pMARKET VALUE:£137mn
TOUCH:80p-83p12-MONTH HIGH:106pLOW: 68p
DIVIDEND YIELD:nilPE RATIO:13
NET ASSET VALUE:41p*NET DEBT:4%
Half-year to 31 MarTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
2021**1023.221.60nil
20221264.332.20nil
% change+24+34+38-
Ex-div:-   
Payment:-   
*Includes intangible assets of £42mn, or 26p a share **Restated