Smart Metering Systems Plc - Strong growth delivered with lower leverage

Smart Metering Systems Plc (LON: SMS) is a FTSE AIM UK 50 index listed Company, installs and manages smart meters, data and carbon reduction assets (CaRe). It was established in 1995 and having presence across 12 locations in the UK.

Rationale for Valuation – Speculative Buy at GBX 571.00

• In H1 FY20, the Company has delivered a robust financial performance, with strong liquidity profile.
• In the last year, the Company has delivered a sparkling return of ~18.78%, which is higher as compared to the FTSE AIM UK 50 Index.
• The Company has decent fundamental metrics as it has maintained a gross margin above 30% for the last two years and ROE above 50% in the last period (June 2020).
• The Company recorded a lower debt-equity ratio of 0.04x (H1 FY20) against the industry median, which reflects that SMS is less leveraged as compared to the industry.
• On the liquidity front, the current ratio was 2.92x in H1 FY20, which is higher than the industry median.
• From the technical standpoint, 14-day RSI stood at ~39.68, which is supporting the upside movement.

Key Risks

• The Company is exposed to operational risk arising due to loss of customers with increased competition and poor operating performance due to climate change.
• The Covid-19 pandemic has negatively impacted the growth of smart meter asset portfolio.
• The UK economy and the business may be adversely affected by regional tensions and instability.

Recent News

On 27 October 2020, the Company announced that the New Ordinary Shares would be issued to shareholders on 29 October 2020, which was 416 new ordinary shares of 1 pence each. It was admitted to trading on AIM on 29 October 2020. It had already confirmed the SCRIP dividend reference price of 634.6 pence.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 15 September 2020)

(Source: Company Website)

• Despite the challenging operating environment, the Company has delivered a robust financial performance, with an increase in the index-linked annualised recurring revenue (ILARR) of 11% year-on-year and underlying profit before taxation of 98% year-on-year.
• On 30 June 2020, the net cash stood at £44.5 million, with committed facilities available of £300 million and no debt outstanding as at 15 September 2020.
• During the year, the Company also disposed of nearly 187,000 I&C meter assets and received £290.6 million in gross cash proceeds.
• The Company intends to pay a dividend per share of 25 pence in respect of FY20, with the first of three interim dividend instalments to be paid in October 2020, followed by a final dividend in July 2021.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV to Sales based Valuation (NTM) (Illustrative)

Conclusion

On 31 August 2020, ILARR from the Group's meter and data assets was £76.6 million and total meter, and data assets under management had surged to 3.80 million from 3.74 million. Following the strong H1 FY20 performance, SMS intends to increase dividend by 10% per annum until FY24, which is supported by index-linked cash flows from data asset base and existing meter. The outlook for FY20 remained unchanged whereby smart meter installation run-rate is expected to reach the pre-covid level by the beginning of FY21.

The Company continues to trade in line with the management's expectations, with the stable cash flows it generates. Overall, SMS seems to be well-positioned to capitalise on the development of CaRe assets and the sizeable contracted smart meter order pipeline.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a "Speculative Buy" stance on Smart Metering Systems at the current market price of GBX 571.00 (as on 02 November 2020, before the market close at GMT 10:58 AM), with lower double-digit upside potential based on 7.00x EV/NTM Sales (approx.) on FY20E sales (approx.).

Somero Enterprises Inc – Operating with Strong Financial Position

Somero Enterprises Inc (LON: SOM) is a manufacturer and distributor of laser-guided equipment. It provides concrete-levelling equipment, training, education, and support to customers in more than 90 countries.

Rationale for Valuation – Speculative Buy at GBX 225.20

• The Company will deliver healthy profits and cash flows to the shareholders, with an early sign of improvement observed at the end of the first half.
• SOM has delivered a substantial return for the shareholders’ as return on equity (ROE) of 10.2% was higher as compared to the industry median. The ROE recorded by the Company in the past three years was considerably above the industry average.
• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.01x.
• As per valuation metrics, EV/EBITDA and Price/Earnings multiples of the SOM are currently lower as compared to the corresponding multiples of the Industrials industry.
• From the technical standpoint, shares were trading well above the short-term support level of 200-day (GBX 225.7) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The next phase of lockdown due to the second wave of COVID-19 outbreak could result in lower demand, a shortage of labour and shut down of operations.
• The Company is facing some direct impact on demand from the coronavirus (COVID-19) outbreak.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 9 September 2020)

(Source: Company Website)

• SOM has shown a strong financial position, with an increase in net cash of 91% year-on-year.
• It also witnessed a strong balance sheet and healthy cash flow, with an interim dividend per share of US$0.040 and the recommencement of the US$1 million share buyback program.
• Despite disruption from COVID-19 pandemic, the Company generated a revenue of US$35.3 million in H1 FY20 and delivered a healthy profit, with an adjusted EBITDA of US$8.7 million.

One Year Share Price Chart

   (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The trading volume in H2 FY20 is expected to improve as compared with the H1 FY20. For FY20, the Company expects revenue of approximately US$75 million, adjusted EBITDA of around US$19 million, and ending net cash of about US$20 million. It witnessed an encouraging sign in the two largest markets (Europe and the US), which will provide a degree of confidence.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Somero Enterprises Inc at the current market price of GBX 225.20 (as on 2 November 2020, before the market close at 10:09 AM GMT), with lower double-digit upside potential based on 16.00x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

*All forecasted figures and Industry/Peers Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.