Why I’d dump Centrica plc to buy this top growth stock

Paul Summers thinks those with sufficiently long investing horizons should consider this fast-growing company over FTSE 100 giant Centrica plc (LON:CNA)

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Times have been tough for holders of shares in energy giant Centrica (LSE: CNA). Stuck in a seemingly perpetual downward trajectory, the stock now trades 50% lower in price than it did back in 2013. With earnings per share forecast to dip by another 17% in the current financial year (repeating the performance seen in 2016) and customers continuing to leave for more nimble operators offering lower prices, the picture doesn’t look particularly rosy for the £11bn cap over the short-to-medium term.

Even Centrica’s major draw as a big dividend payer isn’t quite what it seems. While a forecast 6.3% yield may grab the attention of income-seekers initially, it’s worth pointing out that this payout has remained stagnant over the last couple of years (following an initial cut in 2014) and is only expected to increase by a measly 2% in the current year. With dividend cover also remaining fragile, it’s questionable why investors — aside from the most hardened value hunters and contrarians — would pick Centrica over all the other companies and opportunities available in the market.

A smarter choice?

Given the above, I can’t help thinking that those with longer investing horizons and no immediate need for income should take a closer look at £630m cap, AIM-listed Smart Metering Systems (LSE: SMS). Headquartered in Glasgow, the 22-year-old company connects and operates gas and electricity meters for major energy companies, including — yes, you’ve guessed it — Centrica. 

Since mid-June, shares in the company have powered ahead by 41%. I can’t see anything in today’s interim results to suggest that this kind of positive momentum is about to reverse anytime soon. 

Over the six months to the end of June, revenue increased by 14% to £36.8m, with earnings before interest, tax, depreciation and amortisation (EBITDA) rising by 17% to just over £18m. The company’s total annualised recurring income grew by a whopping 29% compared to the first six months in 2016 to £48.4m.

By the end of the reporting period, Smart had total gas and electricity metering and data assets of 1.68m units — a 34% rise on June 2016. This includes increases of 116% and 77%  in the company’s electricity meter and data portfolios respectively.

Aside from today’s numbers and confirmation that last year’s installation and software business acquisitions had now been fully integrated, Smart Metering Systems continues to seal new deals. Only last month (and thanks to the government’s programme to force energy suppliers to provide all domestic and small business customers in the UK with a smart meter by 2020), the company announced it has signed a rental agreement with Utility Warehouse to provide a minimum of 100,000 new meters to the latter.

Clearly, the kind of growth being shown by the company means that prospective investors will need to pay up for its shares. At 32 times forecast earnings for the full year, Smart is certainly not an option for those seeking value. That said, I think this price can still be justified based on its prospects, along with the high operating margins and returns on capital the business has achieved over the last few years. While the negligible 0.74% yield offered by Smart Metering Systems is also nothing compared to that offered by Centrica, today’s 27% hike to the interim payout is clearly indicative of just how confident management feels about the company’s future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Smart Metering Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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