Smart Metering Systems PLC

LEM solutions does from time to time have positions in Smart Metering Systems PLC, [SMS].


Abstract

So long as the revenues keep increasing and the EPS continues a trend upwards, keep buying dips. Growth appears to be good.


About the company

Smart Metering Systems plc was established in 1995. The Group connects, owns and operates gas and electricity meters on behalf of major energy companies. The Company’s full end to end energy management services and consultancy business support large blue chip companies in the UK, through a network of offices in Bolton, Cambridge, Cardiff, Doncaster, Livingston, Normanton and Rugby. The Company’s services also include infrastructure design, installation, consultancy and project management services for new gas, electricity, water and telecoms connections for licenced energy and telecoms suppliers, end consumers and the UK’s licenced electricity Distribution Network Owners (DNO’s).

Recent news

Smart Metering Systems plc, SMS, on the 18th Sep 2018 announced its
Interim Results for the six months ended 30 June 2018 .

Financial highlights:

• EBITDA increased by 29% to £23.4m (H1 2017: £18.1m)
• PBT increased by 9% to £10.1m (H1 2017: £9.3m)
• Total annualised recurring revenue increased by 43% to £69.3m (H1 2017: £48.4m)
• Pre-exceptional EBITDA increased by 26% to £23.6m (restated H1 2017: £18.7m)
• Pre-exceptional EBITDA margin at 51% (restated H1 2017: 51%)
• Underlying PBT increased by 5% to £11.4m (restated H1 2017: £10.9m)
• Underlying earnings per share decreased by 15% to 8.40p (restated H1 2017: 9.92p)
• Interim dividend of 2.00p per ordinary share, an increase of 15%

The results show acceptable growth in EBITDA & PBT which is a good sign.

Looking at units into the market, the following table is a good guide.

RNS Number : 0839B
unitsJun-18Dec-17Jun-17
Total gas and electricity metering and data assets2,523,0002,031,0001,678,000
Gas meter portfolio1,568,0001,273,0001,064,000
Gas data portfolio129,000126,000118,000
Electricity meter portfolio465,000309,000166,000
Electricity data portfolio361,000323,000330,000

Here, one can observe 6 monthly growth of 21% and 24% (ie. acceleration). This is a good sign given that the number of units is proportional to the company output.

The company has performed well since it’s admission to AIM and continues to do so at a steady and consistent rate.

Company metrics

Below are the company financials.

Interim Results for the six months ended 30 June 2018

Putting the above results into context one might assume a full year revenue of £93 million assuming the six month period continues with no increase.

Most importantly, the £93 mill feeds into a PBT of £20 million (again assuming no change). The net profit margin is 21.5% of revenue, which is good.

The current market capital of the company at the time of writing is £678 million (at a share price of £6.00 per share). This means that the forward earnings multiple will be 34x.

If we look at the ultimate bottom line, the EPS, the company reports as follows:

measure6m to 06/20186m to 06/201712m to 12/2017
Basic earnings per share (pence)7.458.5916.17
Diluted earnings per share (pence) 7.37 8.45 15.98

Again, assuming the full year EPS of, say 16p, with a current share price of 600p would produce an earning multiple of 37.5x.

Usually, for low growth stocks, this would be high. The index average being approximately 16x. However, with continued growth factored in (in fact accelerating growth is observed) this would be obtained if revenues could double over the next few years.

To add to the above the company report states:

recently signed a significant smart meter contract on an exclusive basis with a large independent energy supplier.

Whilst there is no indication of how much this would contribute to the bottom line one may assume, say, a 25% increase in revenue and similar for EPS raising it to 20p to 25p would put a comfortable 600p floor on the share price.

Having looked further into historical RNS, it is seen that previous acquisition was for 250,000 customers.



We are delighted to be working with Good Energy as their exclusive supplier, one of the UK’s leading suppliers of energy from renewable sources, in the rollout of their smart meter programme. Good Energy have over 250,000 customers across the UK, SMS is well positioned to support them with the smart meter rollout given our strong track record for customer services and asset ownership and management


22 August 2018
RNS Number : 5558Y

The previous contract win was 100,000 customers [13 February 2018 – RNS Number : 6532E], so an assumption of 500,000 customers may be rational if significant means more than previous wins.

Growth and saturation

In order to price, it is important to know the market size. Based on the ren service dated 12 September 2017, 14% of the market was used.

Lets assume this has now increased to 20% and that it is likely that saturation would be conservatively at 80%, then the customer base assuming % of market share is held could grow 4x from it’s current position.

Every customer that is acquired contributes to ongoing revenue. So if the rollout is on par with other companies, one may expect a 4x revenue multiple over the longer term.

With efficiencies (economies of scale), this may be significantly more for EPS delivered to the shareholder. Naturally, there will be risk in execution of the role-out and potentially pricing competition which would squeeze margins as those efficiencies were gained. This would act as a resistance to EPS growth.

Historical share price

The share price has increased in line with actual earnings growth and growth expectations based on real data. The 3 standard deviation bands represent a 20% price change. With the last set of data, one may expect this to be to the upside.

Historical share price: TradingView

Conclusion

So long as the revenues keep increasing and the EPS continues a trend upwards, keep buying dips. Growth appears to be good.

As usual, if you have any questions, please feel free to contact LEM solutions via the contact form or email or twitter.

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