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I’d buy this stock that shot up 23% while markets crashed

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The entire FTSE 350 plunged into the red yesterday. Finding winners on a day like March 12 was a matter of seeing who had lost the least. And yet one under-the-radar AIM share leapt by 23%. Why?

Get smart

Glasgow tech firm Smart Metering Systems (LSE:SMS) pushed through the £291m sale of a portion of its energy smart meter assets. After expenses, the sale will produce net cash of £282m, SMS told the market.

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Revealing a substantially stronger balance sheet at a time of crisis in wider markets? Solid move.

CEO Alan Foy said the sale “realises considerable cash returns and demonstrates the substantial value of our smart meter portfolio.”

Smart Metering then hiked its dividend far beyond previous metrics. “It will also enable us to enhance greatly shareholder value with significant and sustainable increase in dividends,” Foy added.

The revised dividend policy puts a loyalty bonus of 25p per share in shareholders’ hands. Payments are intended to increase in line with RPI until 2024. At current share prices around 560p, that represents a healthy 4.6% yield.

A total capital restructure away from expensive debt and into solid cash looks to me like good decision-making. Dividend cover has never fallen below three times earnings since 2014 and at times has been substantially higher.

Long runway for growth

According to figures from the National Audit Office quoted by the BBC, an average of 1.7m smart meters have been installed every year since 2012.

In September 2019, the UK government pushed back the deadline to 2024 for the rollout to offer smart energy meters to every home in Britain. Previously suppliers had until the end of 2020.

Clearly that is significant new headroom for companies like SMS. This more even spread “enables [us] to manage [our] cost base more effectively,” Foy noted.

The company said its order book of another 2 million smart meters was expected to add £40m to its recurring revenue. And the board said it intends to maintain a prudent net debt-to-earnings ratio throughout the rollout.

Resulting gains

Being in business for 25 years makes SMS the UK’s largest integrated installer for independent energy suppliers.

Its 2019 full-year results released in January saw SMS’s performance being in line with expectations. There was nothing too flashy in there. Recurring revenue grew 20% to £90.1m. And its portfolio grew 44% to 1.21m smart meters.

Meter recurring revenue grew by 23% to £77.8m, while data recurring revenue was £12.3m. Recurring meter revenue from smart meters was £38m with £18.6m added from traditional domestic meters.

Long term

The benefit of very strong order book visibility over the medium term can’t be underestimated. Not at times like these.

I can’t see how Smart Metering Systems will be impacted in the long term by the spread of coronavirus. That’s probably a good sign. And the fact that its revenue is rising while it has paid off existing debt and hiked its dividend? Doubly good.

And the stated intent to manage the business with strong cost discipline and an efficient long-term capital structure? Even better.

With oil prices cratering prices not seen since the 1991 Gulf War, those companies focused on the UK’s rapid move to a decarbonised energy society are poised to profit, I feel.

SMS has all the attributes of a strong buy to me and is going straight on my watchlist.

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Tom Rodgers has no current position in Smart Metering Systems. 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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