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Sureserve Initiation Note - October 2021

Sureserve Group is a market-leading energy services and compliance business, installing, improving, maintaining, and inspecting equipment in public sector housing, schools, and other public buildings. It benefits from a stable and low risk revenue and cashflow profile thanks to its heavily recurring revenue contracts and >97% public sector client base. It also enjoys a strong balance sheet, with no debt or pension liabilities. Growth is supported by organic and inorganic factors:
1. it should enjoy organic growth tailwinds from two strong and seemingly immutable trends: increased regulatory pressure around compliance and energy generation equipment; and the need to improve the energy efficiency of the UK's public and private building stock.
2. its markets are predominantly highly fragmented and it's generally one of the leading players therein. This presents the obvious opportunity for a company like Sureserve, which is cash generative and debt free, to make acquisitions where desirable.
The long-term contracts it enjoys are predominantly with the public sector, ensuring not only a large proportion (>75%) of revenue is effectively recurring, but also that cashflow is predictable as these clients are reliable payers. Offering further stability, both of is segments are energy source agnostic, offsetting a key perceived risk around the replacement of natural gas in the home heating mix. Boilers using hydrogen, for example, as well as ground or air heat pumps, would still need to be inspected regularly for safe and effective operation and we would expect any new regulatory environment to reflect this. Management is continuously investing in alternative energy expertise.
To us this suggests an asymmetric risk profile, with more upside potential than downside risk, provided Sureserve continues to execute on client contracts and M&A opportunities as well as it has done so far.
On top of this, the company is inherently ESG-friendly, with much of its revenue derived from reducing energy usage (and therefore cost - particularly for those most in need of such savings due to its local authority housing exposure) and ensuring safety of potentially dangerous equipment (such as boilers), as well as installing and maintaining equipment that mitigates risk – such as fire detection and suppression systems.
It currently yields 2.75% and the dividend is well covered. Consensus anticipates ongoing dividend growth (50% for FY21, and a further 30% in each of FY22 & FY23), which would still represent a 20%-30% payout ratio. We believe the headroom is sensible, despite the stability of cashflows, due to the potential need to fund cash acquisitions on an ongoing basis.
It trades on an unchallenging 13.2x FY21(cons) PE, and 8.8x EV/EBITDA, which, combined with the yield makes it look cheap to us.