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Questor share tip: Energy Assets jumps on British Gas deal
The smart meter business has signed a deal with British Gas that underpins dividend and profit growth, says Questor.
Energy Assets
390p+32½p
Questor says BUY
ENERGY Assets yesterday signed an agreement with British Gas to install smart meters for business customers across the UK, sending shares 9pc higher.
Questor thinks the deal further underpins our long-standing buy recommendation.
The deal will see Energy Assets install smart meters for 50pc of British Gas business customers across the country on 20-year contracts. Revenue from these contracts is guaranteed to increase in line with retail price inflation increases for the same period.
Steve Woolf, from Broker Numis, upgraded the shares to a buy, adding: “The award represents a step-change to its meter installation volumes in the short term, and secures a long-term recurring revenue stream.”
Questor thinks the long-term outlook for the company is good. The company buys smart meters, installs them and then charges an annual fee for their use. The average meter costs £850, and generates £135 a year in rental fees for Energy Assets. The upfront capital cost of the meters is funded by debt that is paid off over an eight-year period, while the meter can last up to 20 years, and often well beyond.
Energy Assets should eventually be debt free and churning out cash. In the meantime the borrowing is asset backed by revenue-generating meters. The meter rental fees are guaranteed by blue-chip utility companies like British Gas.
The core meter asset management division – responsible for 43pc of group revenue – is roaring ahead. The group reported 101,000 meters at the end of March, up from about 81,000 a year earlier.
The company is forecast to achieve pre-tax profits of £9.1m, on revenue of £34.8m, in the 12 months to March 2015, up from £6m and £24.2m respectively last year. That provides forecast earnings per share of 26p.
The shares are trading on a forecast price-earnings ratio of 13.8 times, falling to 10 times next year. What’s more, the dividend is expected to almost triple from 3p this year to 6p next year and then 8p the year after.
Energy Assets is still a bit risky. However, Questor likes its steady growth profile and income potential and retains the recommendation on the shares. Buy.