Australia | Jun 04 2015
-Risk from smart meters long term
-But maybe an opportunity too
-Discount to global peers widens
By Eva Brocklehurst
Spotless Group ((SPO)) will acquire Utility Services Group, which operates under the Skilltech, Fieldforce and Utility Asset Management brands. No details on earnings or the acquisition price – other than it is in a range of $50-100m – were provided and the transaction will be internally funded through debt.
UBS suspects it is a relatively lower margin business compared with Spotless Group’s other businesses. Nevertheless, there is a reasonably high predictability for earnings as well as contract renewal rates. The broker believes the acquisition will further diversify the customer base and provide the ability to cross-sell other services to these customers. There is potential for new smart meter installations to pose a long-term risk to meter reading but this, in UBS’ view, could deliver an opportunity in terms of installing smart meters.
Utility Services provides retail meter reading and installation in the electricity, gas and water sectors, as well as offering asset management such as maintaining poles and wires and clearing vegetation for electricity distribution. It is the largest operator in meter reading with a 60% market share – estimated by UBS to be around 50% of revenues – and has a national footprint and annual revenue of over $200m, with 1500 employees. This is a small scale acquisition for Spotless, which has group revenue of around $2.7bn.
Overall, UBS is attracted to the growth potential for Spotless and its strong industry position and maintains a Buy rating. Deutsche Bank on the other hand retains a Hold rating on the basis of a low total shareholder return. This broker also believes the business could lose some of its meter reading revenue in the long term as smart meters are rolled out. Deutsche Bank assumes the company was acquired at the upper end of the guided range and incorporates the acquisition into forecasts, estimating a net accretion to earnings of 5-6% for FY16.
Macquarie suspects the earnings margins are below the average for Spotless, which has facility services margins of 9.2%, but the transaction should be modestly accretive in FY16. The broker notes Spotless is committed to improving acquisition margins over time via back office integration and a reduction in overheads. Macquarie forecasts FY15 earnings growth of 27%, driven by a full year of cost savings as well as new initiatives coupled with 7.0% underlying revenue growth. The acquisition is considered strategically sensible, proving exposure to an outsourcing trend which is likely to accelerate as the utilities sector is privatised.
Macquarie observes, since listing in June 2014, the stock has averaged a discount of 18% relative to global peers and, with the recent sell off, this has widened to a 22% discount. After making the relevant considerations relative to global peers the broker retains an Outperform rating.
FNArena’s database contains three Buy ratings and one Hold for Spotless. The consensus target is $2.27 , which signals 6.9% upside to the last share price. Targets range from $2.14 (Deutsche Bank) to $2.40 (Citi). The dividend yield on FY15 forecasts is 4.7% and on FY16 it is 5.1%.
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