A data centre winner

Crestchic (LOAD: 242p), a fast-growing business that makes, sells and rents load banks and transformers for the commissioning, testing and maintenance of independent, off-grid power sources, has issued its third earnings upgrade this year, and it's a considerable one.

The group has been awarded extensions to ongoing rental projects in various locations across the world, has secured its largest ever hire contract, which will benefit both the second half of 2022 and the first quarter of 2023, and has enjoyed a record level of sales orders, the majority of which will be fulfilled in 2023. The record contract win, in addition to the strength of ongoing trading, prompted the board to significantly increase its profit guidance.

House broker Shore Capital and research firm Equity Development have taken note, raising their 2022 and 2023 pre-tax profit estimates by 38 per cent to £7.2mn and £8.1mn, respectively, with identical earnings per share (EPS) upgrades to 19.5p (2022) and 21.8p (2023). The additional profits feeds through to an improved net cash position of £2mn (from £0.6mn) at the end of 2022, almost trebling to £5.5mn (from £2.8mn) at the end of 2023.

There is real substance to these upgrades given that a material proportion of the work secured over the past two months will continue into next year, and the directors are “increasingly confident that the growth [achieved this year] represents a sustainable step change in the underlying performance of the group”. They have a point as Crestchic continues to benefit from high levels of data centre activity globally and is now seeing higher than expected demand from the oil and gas exploration sector, particularly in the Middle East and Asia, as national energy strategies respond to political uncertainty and the surge in fossil fuel prices.

Furthermore, equipment utilisation is at an all-time high and Crestchic's ability to manage its hire fleet and redeploy it on a global basis is enabling the group to win major hire projects. The expanded factory capacity in Burton-on-Trent and new depots (Texas and Antwerp) support the board's strategy of growing both hire and sales revenue around the world, particularly in North America and Europe.

Crestchic’s share price has risen 21 per cent since the last profit upgrade (‘Tap into a data centre winner’, 15 June 2022), and is now up 94 per cent since I initiated coverage ('Alpha Research: A high-growth play on the battery storage boom’, 7 September 2021). However, the shares still only trade on a forward price/earnings (PE) ratio of 11 for 2023, a modest rating given the end market demand drivers.

Equity Development has raised its target price to 283p (from 249p) and PMH Capital upgraded its target from 275p to 330p (based on a current year enterprise valuation to cash profit multiple of 10 times and 12 per cent post-tax return on capital). I am following suit, raising my own target from 250p to 300p based on a 2023 PE ratio of 14. The company is an obvious bid target, too. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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