Thursday, 19 March 2020

Smart Metering Systems - Portfolio Addition


SMS is an AIM-listed small company with HQ in Glasgow. Current market cap. is around £650 million. It employs over 1,200 people throughout the UK and its core business as the name suggests is the roll out of smart meters and carbon reduction assets to facilitate the transition to a low carbon future.

They offer a comprehensive service to the energy suppliers including the operation of metering databases as well as connection services directly to large energy consumers and multi-site operations. No other UK organisation offers the same in-house service.

Their mission is simply to deliver the future of smart energy. Customers include the large utility companies as well as smaller independent providers and new market participants; large UK housebuilders and also property developers; large supermarkets, retail chains, banks as well as rail and telecoms companies


Smart Meters

If the UK is to reach its target of net zero emissions by 2050, it will be crucial to look at new ways of how energy is created, stored and used. Smart meters will be an essential key to the creation of a more flexible, decentralised low carbon energy system and the government are already committed to the widespread roll out of smart meters by 2024. So far, around 16 million homes have been converted which leaves a further 36 million homes to have a smart meter fitted over the next four years.

Many energy providers will no longer allow customers to switch supply unless they have a smart meter so this should help to speed up the roll out.

Smart meters connect the user with their energy supplier and the wider energy network. When enough customers are connected, it will be possible to more accurately predict how much energy is required around the country at any particular time of day and should help to match supply and demand and balance the entire grid. Another feature is the possibility that relatives could be alerted if elderly people showed signs of dementia due to unusual energy usage or dangerously underheated homes in Winter for example.



It should be possible to create a local neighbourhood network and trade energy with other groups or communities as well as sell surplus energy from combined solar energy panels to the highest bidder. Another aspect is using smart time-of-use tariffs to charge the electric car at the cheapest rates and also use the combined resources of energy stored in car batteries to move both ways.

Results

The company recently announced results for the full year of 2019 (link via Investegate). Pre tax profits grew by 2.1% to £5.5m on revenues of £114.3m (2018 £98.5m). The full year dividend was lifted by 15% to 6.88p and a final dividend of 4.58p will be paid 4th June with XD date of 23rd April.

There was a 20% increase in recurring revenues to £90.1m and assets under management increased from 3.1 million to 3.7m over the year.

They also announced a new partnership with Columbia Threadneedle Sustainable Infrastructure Fund to develop its pipeline of carbon reduction asset opportunities.

Earlier this month the company agreed a sale of a minority of their meter assets for £291m. This will enable the implementation of an enhanced long-term sustainable dividend policy.

Commenting on the results, Alan Foy, Chief Executive Officer:

"A 20% increase in our key financial metric - ILARR - and a 14% increase in EBITDA in extremely challenging markets, is a testimony to our market position and operational capabilities.

Last week's transaction will not only realise considerable cash returns and demonstrates the substantial value of our smart meter portfolio but also will enable us to enhance greatly shareholder value with a significant and sustainable increase in dividends.
The UK is the first major economy to adopt net zero emissions by 2050, mainly by electrification strategies. This will need the establishment of a decentralised and decarbonised energy system as well as substantial capital to meet that target.
A combination of our strengthened balance sheet to support our smart meter rollout programme, today's partnership announcement with ESIF and our energy management division's track record, positions us extremely well to accelerate and rapid expand our CaRe assets in the current and emerging electricity generation, storage, lighting, heating and transportation markets."  
12m share price comparison v AIM 100

The markets responded positively to the results and sale of assets, the share price briefly topped the £6.00 level but has retreated due to the COVID-19 fears. The shares joined my portfolio this week at the price of 558p. I am keeping fingers crossed this is not another acquisition that would have been better made a week or two later!

However as Novel Investor reminded me yesterday:

Bargains exist in this market. Opportunity seekers waiting for the “right” time to buy will never find it. At some point, just do it. You’re practically guaranteed to be wrong in the short term, but right in the long term. It just takes courage.

Stay safe, avoid the crowds and keep washing those hands.


As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in smaller companies can be rewarding but is higher risk - always DYOR!

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