Sureserve Group – strong order book, cash position and increasing profits exposes undervalued shares
This group’s shares should be a great deal higher than they are currently!
Just bringing the valuation of the Sureserve Group (LON:SUR) up in line with the UK market average would see it worth at least 126p a share compared to last night’s closing level of just 88p.
If achieved that would show a significant 43% gain, certainly not to be sniffed at and well worth pursuing for any portfolio.
The Last Trading Year
The Dartford-based leading UK social housing energy services group, which employs over 2,670 staff across its 31 UK offices, yesterday reported that the year to end September 2022 saw revenues up 27% at £275.1m (£216.6m), while its pre-tax profits were an impressive 40.5% better at £15.6m (£11.1m), boosting earnings 28.6% to 9.0p (7.0p) per share.
Despite inflationary pressures it is visible that the group was able to mitigate against such effects, identifying its overall operating strategy.
Strong Cash Position
There was a substantial increase in the group’s net cash position at £23.3m (£16.4m), showing strong generation. The group’s average contract length has increased 20% to 6 years, with 90% of its gas contracts being price-index linked.
Massive Order Book
Also of important note is the fact that at the trading year end the group’s order book was 18.0% higher at £593.5m (£502.9m). Just imagine the benefit for any company boss at the start of a year that nearly 80% of the current year’s business is already visible.
Sureserve’s social housing owner clients are required to maintain safe gas supplies, while addressing energy poverty, underpinned by the Government’s commitment to improve national energy security and reduce carbon.
Chief Executive’s comments
CEO Peter Smith stated that:
"I am pleased to report a year of progress at Sureserve building on last year's momentum to achieve strong increases in revenue and profits. Our order book of £593.5m is a tremendous asset, providing a clear line of sight of future revenues, and the shift to longer-term contracts that we have seen gives us confidence in the year ahead and beyond.
Last year we stated our ambition to be to be the UK's leading social housing energy services provider. We remain focused on pursuing a strategy of both organic growth and acquisitions to increase our presence in the gas heating and renewables sectors, and our acquisition of CorEnergy has proven to be a successful addition to our renewables expertise. In a fragmented market, our defined strategy supports our ambitions to be a leading social housing energy services provider delivering projects that matter at the forefront of the UK energy transition.
The Group's experienced management teams are well placed to support our clients through the energy transition, and deliver against our ambition to double our sales and further improve net margins and earnings per share within the next four years.”
Broker’s View – undemanding rating
Analyst Alastair Stewart at Shore Capital believes that the group’s rating is undemanding given the cash-rich group’s growth prospects and revenue visibility.
His estimates for the current year to end September 2023 see £303.7m revenues, £18.1m adjusted pre-tax profits, worth 8.6p in adjusted earnings per share, while net cash increases to £32.4m.
For next year, without the benefit of any intervening acquisitions, he goes for £318.9m sales, £19.2m profits and 8.8p per share in earnings, ending the year with £36.7m net cash.
My View – an excellent example of sustainable growth currently under-rated
The shares, which last night after more than trebled the average daily dealing volume, closed up 3p on the day at the current 87.5p, only value the group at £145.5m which is far too low considering its order book, its profits growth and its strong cash generation.
I recently set a new Target Price of 106p on the shares, within months, which I believe is an easy price objective.
Further into the year I see the shares climbing steadily towards the 120p barrier and above.
(Profile 14.01.20 @ 36p set a Target Price of 50p*)
(Profile 06.01.23 @ 85p set a Target Price of 106p)
(Asterisks * denote that Target Prices have been achieved since Profile publication)