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Fulcrum powers up

The infrastructure services business is expanding its operations in asset ownership, with considerable upside potential
January 11, 2018

Fulcrum's core infrastructure services business provides clients in the residential, commercial and industrial markets with utility infrastructure for both new developments and existing sites. Demand for Fulcrum's design, installation and alteration skills is strong, with the order book at the end of September 2017 11.2 per cent ahead at £33.7m. But we think a push into infrastructure ownership now looks set to propel the company into a new phase of growth. Fulcrum is keen to invest in the highly reliable, low-cost, annuity-style returns to be had from owning and maintaining infrastructure, and we expect more investors will warm to the shares as this strategy plays out. And Fulcrum's ambitions have recently been given a noteworthy boost by the grant of a licence to operate electricity cables, in addition to the gas pipes and meters it is already allowed to own and maintain. 

IC TIP: Buy at 65p
Tip style
Value
Risk rating
Low
Timescale
Long Term
Bull points

Growing order book

Electricity licence granted

Net cash

Rising external asset purchases

Bear points

Need to increase debt facilities to fund growth

IFRS 15 risk unclear

While the amount of money Fulcrum makes from owned assets is currently a small proportion of the total – 5 per cent of first-half sales and about 15 per cent of first-half cash profit – this side of the business is developing fast. Last year the group gained accreditation to enter the low-pressure gas meter market, which it entered in October. Then in November it was granted an independent network operator’s licence, which allows it to operate electrical assets once an industrial qualification process is completed early this year.

As well as being able to operate the pipes, cables and meters it installs itself, Fulcrum can buy assets from external utility infrastructure providers that are not licensed to operate assets. The opportunities to secure external assets are significant. The annualised asset purchase run rate reached £10m at the end of September compared with a book value of owned assets of £13.1m. The group is expected to continue to move quickly to grow its asset base by drawing on its £14.5m of net cash. And management is also looking at increasing the company's £4m debt facility to help it take full advantage of opportunities. 

While owned assets may be one key focus for growth, infrastructure services remains very much the core of the business. Prospects look good here, too. Indeed, the infrastructure division's strong first-half showing was largely behind an 8.3 per cent rise in group sales to £19.6m for the six months to September. The division won a number of notable contracts, including a £2.4m gas infrastructure project and a £0.8m multi-utility services contract for a commercial development in Nottinghamshire. Meanwhile, having provided electricity connection for electric vehicle charging points, the group is expanding its service to offer end-to-end solutions. This has the potential to prove a lucrative growth market and prospects have been boosted by a government pledge last year to provide £400m to help develop a national charging network and subsidise electric vehicle purchases. 

It is as yet unclear what impact a new accounting rule called IFRS 15, which came into force at the start of the year, will have on reported numbers. The rule concerns how companies are allowed to book contracted revenue. 

FULCRUM UTILITY SERVICES (FCRM) 
ORD PRICE:65pMARKET VALUE:£114m
TOUCH:64-66p12M HIGH / LOW:68p49p
FORWARD DIVIDEND YIELD:3.4%FORWARD PE RATIO:17
NET ASSET VALUE:8pNET CASH:£14.5m
Year to 31 MarTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201533.71.20.70.4
201636.14.62.60.9
201737.76.73.61.9
2018*40.97.44.12.0
2019*43.08.13.92.2
% change+5+9-5+10
Normal market size:5,000   
Matched bargain trading    
Beta:0.098   

*Cenkos forecasts, adjusted PTP and EPS numbers