Fulcrum wants to double again

Fulcrum's share price has tripled this year, and its "best ever" first half has triggered another round of excited buying. The utility company, which provided the gas that lit the Olympic flame, has a loyal customer in British Gas and recently won a second contract with Scottish whisky distilleries. Yet, despite the share price surge from less than 5p in 2013, the story may have further to run.

Although revenue inched 2% higher to £17.1 million in the six months to 30 September, pre-tax profit climbed from a £0.2 million loss to £1.6 million profit, giving adjusted earnings per share (EPS) of 1p. Adjusted cash profit doubled to £2 million. High in confidence, Fulcrum has also launched its first interim dividend of 0.3p per share.

This impressive improvement in profit margin has been driven by more selective bidding and management's decision to bring the McNicholas utilities team in-house at the beginning of the year. The group can now provide sales, planning and design and operational delivery through one brand, which has saved money and improved service.

"That's really what we are looking for at Fulcrum, because the utilities industry isn't necessarily renowned for reliability and quality of service, but we can see Fulcrum being the stand-out player," chief executive Martin Donnachie told Interactive Investor.

It's been a busy six months for the company, winning a 26-month extension to its British Gas contract, which will see it provide utility connection and metering services across the UK until January 2018.

Fulcrum is also laying the 13 kilometre pipeline to connect four Speyside whisky distilleries with Scotland's main gas network for £4 million, the group's second-biggest contract to date. Fulcrum also delivered over 1,100 smaller projects worth under £100,000.

(click to enlarge)

After rallying 16% to all-time highs of 23.2p Tuesday - and 250% since the beginning of 2014 - Fulcrum shares still trade on a modest 12 times forward earnings. Originally owned by British Gas before being sold to National Grid, Fulcrum raised £11 million by coming to market five years ago to cut debt and bankroll growth.

"Three years in and things hadn't gone to plan," Donnachie explains. "The company was still losing money heavily, it had spent all of the money it had raised on AIM and was in a pretty sorry state." This was when Donnachie arrived at the business, with Martin Harrison joining as chief financial officer a year later.

"Our mission since then has been to make sure the company has a viable future and to get the company to a place where it can deliver profit successfully," the boss continues. "That is where we are now and the next stage is growing from here."

'Fulcrum can double in size'

With net cash of £5.6 million and a new undrawn revolving credit facility for up to £4 million, growth is well-funded. And Donnachie is "very ambitious" in his outlook, with a number of markets he wants to grow into. Ultimately, he reckons Fulcrum can double in size - although he warns the time it takes to secure orders have meant "modest" top line guidance.

Currently winning large and regular key accounts - like with British Gas - and significant one-off major projects - like with the distilleries - the group wants to expand into the competitive housing market and build on its smaller, technical sales. Fulcrum has around £10 million-worth of work in key accounts at the moment. Says Donnachie:

"Fulcrum is quite interesting in that we can deliver £1,000 projects anywhere in the country, right up to these fairly complex multi-million pound projects like the distilleries and the Olympic Flame."

Cenkos analyst James Fletcher is impressed and has upgraded forecasts by around a third for both 2016 and 2017, expecting £3.3 million and £4.4 million of adjusted pre-tax profit respectively.

"On our upgraded forecasts, FCRM trades on an ex-cash [PE ratio] of 7.5x in full-year 2016 and [enterprise value divided by earnings before interest, tax, depreciation and amortisation (EV/EBITDA)] of 6.0x," says Fletcher.

"Our sum-of-parts valuation indicates a market cap of £41.9-47.9 million, equivalent to (27.1-30.9p per share). Despite strong appreciation this year, we feel current  pricing  still represents a  good entry point."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.