Smart Metering Systems PLC – Maintaining a progressive dividend policy.

Established in 1995, Smart Metering Systems PLC (LON: SMS) is a FTSE AIM UK 50 Index listed Company, which installs and manages smart meters, data, and carbon reduction assets (CaRe). It is headquartered in Glasgow and having presence across 12 locations in the UK.

Investment Rationale – Speculative Buy at GBX 610.00

• From a technical standpoint, 200-Day SMA (590.99) and 14-Day (36.81), supporting the upside potential.
• Over the past four years, (FY16 to FY20), revenue has surged at a CAGR of ~13.78%.
• Over the past one year, the stock has yielded a positive return of 39.36% while the benchmark index (FTSE AIM UK 50) has underperformed with merely 12.33% return.

Risk Assessments

• The Covid-19 pandemic has negatively impacted the growth of smart meter asset portfolio.
• There is a customer credit risk with the economic downturn.
• The changing government regulations can impact the business growth trajectory.

Recent News

8 October 2020: Post payment of an interim dividend of 6.25 pence per share, the Company also announced the scrip dividend reference price of 634.6 pence under the scheme.

Half-year results - for the six months ended 30 June 2020 (as on 15 September 2020)

 (Source: Company Website)

• The Company delivered a robust H1 FY20 performance despite the challenging operating environment with a substantial increase in underlying profitability and index-linked annualised recurring revenue (ILARR).
• The underlying profitability before taxation jumped by 98% to £9.1 million (H1 2019: £4.6 million) while maintaining a dedicated focus on cost control.
• As of 30 June 2020, net cash was £44.5 million against the net debt £186.6 million on 30 June 2019.
• During the year, the Company also disposed of nearly 187,000 I&C meter assets and received £290.6 million in gross cash proceeds.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

Following the strong H1 FY20 performance, SMS intends to increase dividends by 10% per annum until FY24, which is supported by index-linked cash flows from data asset base and existing metering. 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. Overall, SMS is well-positioned, both operationally and financially, to capitalise on the development of CaRe assets and its sizeable contracted smart meter order pipeline. Stock 52 week High and Low were GBX 742.00 and GBX 425.00, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on Smart Metering Systems PLC at the current market price of GBX 610.00 (as on 12 October 2020, before the market close at 11.02 AM GMT+1) with lower double-digit upside potential based 2.08x Price/NTM Book (approx.) on FY20E Book Value Per Share (approx.).

*All forecasted figures and Peer Information have been taken from Refinitiv, Thomson Reuters.

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

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