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.

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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With that in mind, FTSE 100-member ITV (LSE: ITV) could offer improving investment prospects. The company has a low valuation, high yield and a strong position within its sector. Alongside another stock which reported on Friday, it may offer a wide margin of safety at the present time.

Improving prospects

The company in question is integrated metering services specialist Smart Metering Systems (LSE: SMS). Its post-close trading update showed that continued investment during the year has led to a 54% rise in the total number of metering and data assets under management. Total annualised recurring revenue for the year increased by 32% to £75.3m. Its Gas division saw meter recurring revenue rise by 19%, while its Electricity division’s meter recurring revenue almost doubled.

The stock also announced an agreement with Co-Operative Energy to provide services as an integrated domestic smart meter installer and Meter Asset Provider. It is now the preferred supplier to fund and install domestic smart meters on behalf of Co-Operative Energy in certain defined geographic areas, with there being 326,000 meter points within such areas.

Looking ahead, Smart Metering Systems is forecast to post a rise in earnings of 35% in the current year. Since it trades on a price-to-earnings (P/E) ratio of around 0.8, it could offer good value for money.

Low valuation

Also appearing to offer good value for money at the present time is ITV. The company trades on a price-to-earnings (P/E) ratio of 8.5 after recording a period of disappointing share price performance. Its financial outlook has deteriorated, with demand for TV advertising apparently coming under pressure as the prospects for the UK economy have become less positive.

Of course, all cyclical shares see their financial performance exaggerated by the prospects for the economy. From an operational standpoint, ITV seems to be making good progress in terms of maintaining a disciplined stance on costs and building market share. As such, this could be an opportune time to buy it, with it having the potential to generate stronger levels of profitability and share price performance once the UK’s economic performance picks up.

In the meantime, the stock has a dividend yield of around 6.3% from a payout which is covered 1.9 times by profit. Its income appeal seems to be strong due to its large amount of headroom when making dividend payments. Therefore, for value and income investors who have the patience to buy and hold over a multi-year timeframe, it could have significant appeal.

The post Forget buy-to-let. Here’s why I’d rather invest in FTSE 100-member ITV’s share price appeared first on The Motley Fool UK.

Cash injection

Yet as an early-stage mining company, Sirius Minerals’ share price is highly volatile. For example, after beginning the year at 24p, the stock surged to 39p in early August before plummeting back to 26p in the last week or so. However, in the last few trading sessions, the shares have moved back up to 31p after the group released news on Friday that it had secured a $250m cash injection from Australian mining magnate Gina Rinehart, plugging a funding gap caused by surging development costs at the North Yorkshire mine. The extra cash should tide Sirius over while it raises more than £2bn in debt funding for the mine’s development. Does this news impact the investment case for SXX shares?

Long-term play

To my mind, this news doesn’t change the investment case for Sirius significantly. I still see SXX as quite a risky investment simply because production at the company’s mine is not expected to start before 2021 and costs could continue to soar between now and then. Sure, there’s money to be made by trading in and out of the stock, but with revenues and profits still a long way off, the stock is extremely speculative, to my mind. As such, I won’t be investing in the shares for now.

A better growth stock?

However, one growth stock that does look quite interesting to me right now is Smart Metering Systems (LSE: SMS) which installs, owns and operates gas and electricity meters in the UK on behalf of major energy companies. As a smart meter expert, the group looks well placed to benefit from the UK government’s plans to have smart meters installed in every UK household by 2020.

SMS has released half-year results today and the numbers look solid. For the six months to 30 June, revenue increased 27% to £46.7m and EBITDA surged 29% to £23.4m. While underlying earnings were a little weaker than the first half last year due to higher investment costs, the group did hike its interim dividend by 15% signalling confidence from management. At 30 June, the group had total gas and electricity metering and data assets of 2.5m, up from 2m at the end of December. CEO Alan Foy was upbeat about the results, commenting: “I am delighted with the progress over the last six months and we will continue to invest in our business to capitalise on the domestic smart metering rollout programme.”

After a strong run over the last three years in which SMS rose around 150%, the stock has pulled back by around 25% over the last six months. As a result, the shares now trade on a forward P/E of 33, falling to 24 times next year’s estimated earnings. At that valuation, I believe SMS is worth a closer look.

The post Is Sirius Minerals a ‘buy’ after this news? appeared first on The Motley Fool UK.

With that in mind, today I’m looking at two exciting small-cap companies that are growing at a healthy rate. Will you regret not buying these stocks in a decade?

Smart Metering Systems

Smart Metering Systems (LSE: SMS) installs, owns and operates gas and electricity meters throughout the UK for domestic, industrial and commercial customers. The company is an expert in the installation of smart meters and is therefore well placed to benefit from the UK government’s target to have smart meters in every household by 2020.

SMS floated back in 2011 at 60p per share and the stock has been a spectacular investment since, generating capital growth of over 1,000%. Can the shares keep performing? Let’s take a look at today’s results for clues.

For 2017, revenue came in at £79.6m, up 18% on last year, and beating analysts’ estimates of £78.1m. Total annualised recurring revenue increased 38% to £57m. On an underlying basis, earnings per share rose to 19.93p, up from 19.66p last year. Impressively, the company was able to pay down its debt pile from £94m to £37m and hike its full-year dividend by a huge 27% to 5.2p per share.

Chief Executive Alan Foy was upbeat about the company’s prospects, stating: “2017 has been a year of investment in our business – building capacity to grow and deliver for our customers, particularly in the domestic smart meter rollout. We enter 2018 with a solid financial platform and are well positioned to continue making progress in our core markets.”

Today’s results suggest to me that the growth story here remains intact. The shares don’t come cheap unfortunately (a forward P/E of 33.6), but given that the stock is down 20% this year, now could be a good time to take a closer look.

GB Group

Another small-cap stock I’m bullish about is identity specialist GB Group (LSE: GBG). The £650m market cap group helps companies and governments verify identities and protect themselves against fraud, cybercrime and financial loss.

Identity fraud is a significant problem all over the world and GB Group is benefitting as a result. Over the last three years, revenue has surged from £42m to £88m and net profit has increased from £3.5m to £10.8m. For the year ended 31 March, analysts expect revenue and net profit to hit £117m and £18.4m respectively. Half-year results released in November revealed strong momentum, with adjusted earnings per share rising 69%.

The valuation here isn’t cheap either, with the shares trading on a forward-looking P/E of 34.9, but given the growth potential, I can see GBG’s share price moving considerably higher over the long term.

The post 2 growth stocks you’ll wish you’d bought 10 years from now appeared first on The Motley Fool UK.

However, there’s one company that has managed to shrug off these concerns and attract a high valuation thanks to its impressive growth.

Customer focus 

Smart Metering Systems (LSE: SMS) connects, owns and operates metering systems for gas/electricity suppliers. Over the past six years, as the demand for smart meters has grown, revenue has exploded by more than 300% and reported net profit has increased by 590%. 

It looks as if these impressive rates of growth carried on throughout 2017. According to the company’s year-end trading update, published this morning, total annualised recurring revenue for the period to 31 December grew 38%, and the overall number of assets under management by the firm increased by approximately 62% to 2.03m. For the gas division, meter recurring revenue grew by 15%, while recurring data revenue increased by a similar amount. Electricity meter recurring revenue nearly tripled during the period, and data revenue for this division rose 56% for the year to 31 December. 

Following this robust performance, management is expecting the company to report full-year earnings in line with current City expectations. Analysts have pencilled in Earnings per share growth of 10% for 2017 to 19.2p followed by an increase of 17.6% for 2018 to 22.6p. 

Unfortunately, the one downside of SMS’s explosive growth is that the shares have attracted a relatively high valuation of 38.2 times forward earnings. Still, while this is high, I believe that it is a suitable multiple for a business that is growing recurring revenue at a rate of more than 30% per annum and assets under management at a rate of more than 60%. As SMS continues to grow, I believe that it won’t be long before this valuation is out of date.

Dividend champion

Another grand champion I’m positive on the outlook for is IG Design (LSE: IGR). Over the past three years, shares in IG have surged by more than 400% as the company has grown net profit at a staggering 122% per annum on average. City analysts don’t expect this trend to end any time soon with growth of more than 50% pencilled in for fiscal 2018 followed by net profit growth of 14% for 2019. Earnings per share are expected to expand by a total of 55% during this period. 

Formerly known as International Greetings, IG is a designer, manufacturer and distributor of items such as gift packaging and greetings cards. This is a relatively low-margin business, but the firm’s increasing scale is allowing it to achieve returns not available to smaller peers. For example, over the past five years, return on capital employed — a measure of how much profit a company is generating for every £1 invested — has increased from 7.6% to 15.5%. Improving economics have driven free cashflow growth, and thanks to its improving financial position, IG has been able to grow its dividend from 1p per share and 2015 to an estimated 5.5p for fiscal 2018. 

Despite this impressive profit and dividend growth, shares in IG look relatively cheap compared to those of SMS. The stock trades at a forward P/E of 17.9 and yields 1.5%.

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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.

The post Why I’d dump Centrica plc to buy this top growth stock appeared first on The Motley Fool UK.

GB Group

GB Group (LSE: GBG) is a specialist in identity data intelligence. By combining trillions of data records relating to people’s identity, GB Group uses this information to help its clients in the fight against fraud. 

Fraud is a significant threat to both businesses and individuals in today’s digital age. Indeed, online fraud is now the most common crime in the UK, according to the Crime Survey of England and Wales. Accountants KPMG estimate the ‘value’ of fraud committed in the UK last year topped £1bn. In short, society is battling a fraud epidemic.

GB Group appears to be benefitting from the problem and has enjoyed strong growth in recent years. Turnover has increased from £32m to £88m over the last five years, a compound annual growth rate (CAGR) of 22%, and City analysts expect further growth of over 30% this year.

Full-year results released in June saw adjusted basic earnings per share rise 24% to 13.1p, and the company was upbeat about future prospects, with the chairman saying: “As a result of the investments we’ve made, I believe we can respond even more effectively to the opportunities in the market, create further growth and build on our successes.”

Earnings are anticipated to soften a little this year, before resuming their uptrend in FY2019. At the current share price, GB Group trades on a premium valuation of 31.2 times this year’s estimated earnings, which clearly isn’t cheap. However, I see plenty of growth set to come from the £570m market cap stock.

Smart Metering Systems

Another small-cap that looks interesting, in my opinion, is £635m market cap Smart Metering Systems (LSE: SMS).

The firm, which connects, owns, operates and maintains metering systems and databases on behalf of major energy companies, should benefit from the UK government’s smart meter rollout, which has mandated a smart meter in every home and small business in the UK by 2020.

Smart Metering Systems has enjoyed a strong increase in sales over the last five years, with the top line skyrocketing from £16m to £67m (CAGR 33%) and City analysts expect further growth of 15% and 21% this year and next. Long-term shareholders have done very well, with the stock rising 250% over the last five years, and the company paying out five consecutive increased dividend payments.

Like GB Group, Smart Metering Systems trades at a lofty valuation, with consensus FY2017 earnings estimates of 21.7p per share, equating to a forward P/E ratio of 32.3 at present. However, a premium valuation is to be expected, given the growth prospects on offer. Look out for the company’s interim results this coming Tuesday for indications of further progress.

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Play the game

2016 was quite a year for holders of Keywords stock. Rising well over 200% since last April, its shares now trade for 782p. Based on last week’s full year results, the company’s acquisition-friendly strategy, more recent trading and future prospects for the video gaming industry, I think there could be even more to come.

For the year to 31 December, group revenue — which included the impact of eight acquisitions — increased by 67% to €96.6m. Adjusted profit before tax rocketed by 86% to €14.9m with net cash flow more than quadrupling to €15m. Now boasting 27 studios around the world, there was also a 25% rise in clients (from 51 to 64) using three or more of the company’s six services.

Clearly, such good numbers mean that prospective investors must pay a premium for the shares. Right now, Keywords trades on 34 times forecast earnings for 2017. While that might seem seriously high (and a brief period of profit-taking is likely after such a stellar run), the company’s clear growth trajectory means I’m inclined to think that this could still be a price worth paying.

In addition to recent trading being in line with management expectations, a revolving credit facility has now been agreed with Barclays, allowing the company to continue its acquisition spree. Indeed, in February, Keywords added visual effects and motion graphics agency, SPOV, to its portfolio. With this likely to be the first of several purchases over the year, you wouldn’t bet against the firm meeting analysts’ estimates of a 99% rise in earnings per share in 2017.

Factor-in a history of generating decent returns on capital, a €8.7m net cash position and its market-leading status in an industry showing no signs of slowing down and Keywords comes across as a perfect buy-and-hold investment.

The smart choice?

Recent full-year results from £530m cap Smart Metering Systems were just as impressive.

Continued growth across all business areas led to a 25% jump in revenue (to £67.2m) in 2016. Total gas and electricity metering and data assets increased to just over 1.25m at the end of 2016, allowing total annualised recurring income to rise by 19% to £41.3m. While its gas meters still generate a substantial proportion of this income (£31.5m), it’s positive to note the 125% rise in electricity meter recurring rent (to £2.9m) and total electricity portfolio increase of 166% to 77,000.

Staying with the numbers, gross profit increased by 23% to £36.9m with underlying profit before tax coming in at 19.6m – an increase of 13% on the previous year. In addition to signalling a “strong start” to 2017, CEO Alan Foy also reflected that the company was “well positioned” to continue making progress in its core markets. 

With a price-to-earnings ratio (P/E) of 26, shares in SMS are hardly cheap. However, the Goverment’s desire to have gas and electricity smart utility meters in every UK home by 2020 should keep investors hungry for the stock. Following the completion of three strategic acquisitions in 2016 (CH4, Trojan and Qton), SMS appears to be in a strong position to meet this demand along with the 27% earnings per share growth currently expected by analysts in 2017.

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Impressive performance

The company in question is Smart Metering Systems (LSE: SMS). It installs, owns and manages utility metering assets, and recorded a rise in the total number of assets under management of 28% in the 2016 financial year. This helped to push its total annualised recurring income 20% higher, while the company also signed contracts for the installation and ownership of gas and electricity domestic smart meters with eight energy suppliers.

As a result of its positive performance, it expects 2016’s financial numbers to be in line with expectations. There’s further growth potential from its relatively new status as a fully integrated service provider. This should help to increase its appeal to customers. Its delivery of year-on-year double-digit growth across all of its key metrics provides evidence of its sound strategy and growth plan.

Outlook

In 2017, Smart Metering Systems is forecast to record a rise in its bottom line of 18%, followed by further growth of 54% in 2018. Although it currently trades on a price-to-earnings (P/E) ratio of 28.8, its exceptionally strong earnings forecasts seem to justify a relatively high rating. For example, if it maintains its current rating at the end of this year, its shares will be 18% higher than they are today. Furthermore, it would trade on a price-to-earnings growth (PEG) ratio of just 0.5, which would indicate more capital gains could lie ahead.

Looking beyond 2018, it seems likely that the company will be able to continue to post double-digit earnings growth. After all, in the last four years it has done so in every year. Therefore, it would be unsurprising for it to maintain its current rating at the end of 2018, which could lead to gains well in excess of 50% by 2019.

A challenging sector

Such a bright future contrasts with many of its support services peers, such as facilities management company Mitie (LSE: MTO), which are enduring difficult periods. In Mitie’s case, its new management team has a major turnaround job ahead, with recent profit warnings and the decision to exit from the healthcare business likely to cause a degree of uncertainty in the short run.

Mitie is expected to record a fall in its bottom line of 47% in the current financial year. However, it would be unsurprising for this figure to be downgraded. Part of the difficulty it faces is a potential slowdown in the UK at a time when it’s reorganising its business. Therefore, Smart Metering Systems seems to be a far more attractive purchase at the present time.

The post Why this growth stock could soar 50% by 2019 appeared first on The Motley Fool UK.

Since then we’ve seen a 36% gain, which could be partly down to the likelihood of some economic stimulus through infrastructure expenditure — infrastructure engineering is what Renew does, and it’s focused 100% on the UK market, so that looks promising to me.

Continued success

Full-year results today showed a 14% rise in adjusted pre-tax profit to £22.3m, with basic earnings per share up 10% to 23.53p.

The dividend was hiked by 14% to 8p per share for a yield of 2%, which supports the firm’s recent progressive policy — forecasts suggest 9p per share, which would represent a trebling in just six years. And I can’t see that failing any time soon as the dividend is backed by strong cash flow this year, which saw the company swing from net debt to net cash of £4.8m.

The firm has a new chief executive in the shape of Paul Scott, and chairman R J Harrison OBE reckons the board is “confident of delivering further growth and continued success” under his leadership.

Renew has shown good PEG valuations in recent years, and though forecasts suggest a bit of a rise to 0.7 in the coming year, I think that’s still within an attractive growth range. With a forward P/E of 12.3, I can see a small cap growth opportunity here — and with a market cap of £240m company, I don’t think the risks are too great.

Smart money?

New technology can be profitable, and Smart Metering Systems (LSE: SMS) seems to be doing well from it after having recorded several years of double-digit earnings growth. The firm, which provides entire metering and management systems to energy suppliers, has also enjoyed an impressive share price growth of 487% over the past five years to today’s 600p, but is there any more to come?

I think there could be, and while we’re looking at a forward P/E of 30 for this year (dropping to 26 for 2017), the shares have been valued at the kind of level for the past few years while earnings have been climbing.

At the interim stage reported in September, the company revealed a 25% rise in revenue to £32.3m, and told us that it “now manages over 1 million utility metering and data assets on behalf of energy suppliers in the industrial and commercial and domestic markets“. That might sound like a lot, but it’s really just a small inroad into the total number of gas and electricity meters out there, and the roll-out of smart metering is still in its infancy.

Smart Metering has made some key acquisitions and has signed some important new contracts, and I can see attractive potential for a good few more years of earnings growth.

But that does come with a significant caution, from that high share price valuation. I’d say the shares are priced near the top end of their likely growth valuation, and if we see any sign of less-then-stellar growth we could see investors jumping ship — but if you can handle a bit of volatility, you might want to take a closer look.

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