Gas business heats up Sureserve’s prospects

Sureserve’s (SUR) shift towards focusing on providing energy services to social housing landlords was fortuitously timed, given the greater focus on tackling fuel poverty following Russia’s invasion of Ukraine.

The company now installs and maintains gas heating, smart meters and renewable energy systems. The gas division continues to bring in most work, though, and the average contract length has increased from five to six years, providing greater revenue visibility, chief executive Peter Smith said. 

Its order book grew by 18 per cent to around £594mn at the year-end and it had 93 per cent of this year’s expected revenue secured as of 1 January. More than 90 per cent of gas contracts are also index-linked, providing protection against rising costs. Sureserve's cash profit margin widened from 5.7 per cent to 6.1 per cent.

The company has cash in the bank, but opted not to pay a dividend for the second year in a row, keeping its powder dry for acquisitions. Smith acknowledged this hadn’t played well with retail investors, but said he was “very clear why we’re doing that” and that he had the backing of institutions.

Its M&A activity has been slower than anticipated – it changed advisers last year and deals were harder to complete due to a gap between buyer and seller expectations. It has faced the same issue with the two businesses it is selling – Sureserve Fire & Electrical and Precision Lift Services. It recorded a £3.5mn goodwill impairment against the carrying value of the lift business based on the value of offers received.

Broker Peel Hunt lifted its earnings per share estimate by 7 per cent to 9.3p. The shares trade at just over nine times this level, well below peers. Buy.

Last IC View: Buy, 87p, 25 Aug 2022