Surging Fulcrum rewards faith

Fulcrum did better than expected last year. The gas and electricity infrastructure services provider had a "transformational" 12 months in which profit swelled sevenfold and the cash pile grew by two-thirds. We've been fans of the business for some time and with these numbers our faith has been rewarded.

Once part of British Gas then National Grid before management took it to AIM six years ago, Fulcrum has undergone a major facelift recently. Loss-making until chief executive Martin Donnachie took over three years ago, the business made an adjusted pre-tax profit of £4.6 million in the 12 months to March on revenue up 2.3% to £34.5 million.

Clearly, the emphasis has been on cost and efficiency. Donnachie tells us that overheads, excluding exceptional items, are down by £1 million, and fixed costs of sales plus overheads have shrunk from £17 million to just £10 million over the past three years.

Gross profit margin grew by an impressive 8.8% over the 12 months to 37.6%. A chunk of that is down to Fulcrum's switch to a "direct delivery" model. That's involved bringing all delivery of service work previously outsourced to McNicholas in-house.

Donnachie also told Interactive Investor he is "very confident" Fulcrum can fill the gap left by completion of a £4 million project to connect four Scottish distilleries to the gas network. A big increase in net cash to £8.3 million also underpins a progressive dividend policy.

Fulcrum shares have surged ten-fold since 2013, up from a low of 4.25p to almost 46p this week. At the end of August last year, and priced at 17.88p, our AIM specialist Andrew Hore had named Fulcrum as one of six AIM shares to "survive a stockmarket sell-off". Then in December, and priced at 22.7p, Harriet Mann suggested they could "double again".

House broker Cenkos Securities has just upgraded profit forecasts for 2017 by £0.3 million to account for the better-than-expected cost-savings, and now pencils in £5.5 million, giving adjusted earnings per share of 3.1p, up from 2.6p.

That puts Fulcrum on a forward price/earnings (PE) ratio of 13.8 times. However, strip out forecast year-end net cash of £10.2 million, and that multiple drops to 10.3 times, according to Cenkos analyst James Fletcher.

If Fulcrum does manage to keep progressing and finding further savings – and Donnachie tells us he has "loads of ideas to drive further efficiencies" – business should continue to thrive. Of course, the pace may slow, but successful moves into electricity and water services are encouraging.

Fletcher also chucks a bit of spice into the mix when attempting to value the business. "Energy Assets currently trades on a PER of 19.7x forecast 2016/17 earnings and an EV/EBITDA [enterprise value/cash profit] of 9.6x for the same year. Applying these multiples to Fulcrum's FY17 financials year implies a market cap of £69.0-108.8m, equivalent to 44.1p-69.5p per share.

"While this includes a premium for potential acquisition, it does go to show what a potential acquirer may have to pay to purchase the company."

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.

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.