Smart meters have a reputation for being anything but smart. As part of a scheme designed to reduce consumers’ energy bills, the government has ordered about 53 million of them to be fitted in the nation’s households and small businesses by 2020.
The idea is that bill-payers never have to send a meter reading again because smart meters automatically transmit usage data to the supplier. Consumers also can monitor energy costs minute by minute, hopefully saving money in the process.
Would that it were so simple. The rollout has been beset by delays and failures, most crucially the fact that suppliers have been installing meters that have been unable to talk to other suppliers, meaning that if households switch to cheaper deals the meters stop working properly and become “dumb” again. There have been calls for the government to extend the deadline to 2023.
In theory, none of this should matter to Smart Metering Systems, which is right in the thick of a massive market opportunity: to fit and maintain the meters, as well as managing the data transmitted to suppliers. In practice, speculation about an extension — along with questions about the rollout of the second generation of smart meters — has weighed on its share price in recent months.
Smart Metering Systems began life in Glasgow in 1995 as a gas services contractor, moving gradually into owning and renting out its own meters and, more recently, using an acquisition to move into the electricity market. It now operates nationwide from 12 locations employing more than 940 staff and, as of 2011, has been listed on London’s junior market. At the end of last month, it had a total portfolio of more than 2.8 million gas and electricity meters, including smart and traditional meters for both households and businesses.
Its big opportunity is in the residential smart meter market. It owns 748,000 smart meters out of a total of 12.5 million so far installed in the UK. That might sound small, but it has an 11 per cent share of the present installation rate of about 1.25 million meters every quarter.
Its total meter portfolio gives it annualised recurring revenue, through rental, maintenance and data management contracts, of £71.4 million as at the end of August, meaning that reliable future income streams are looking healthy.
Smart Metering Systems’ statutory results for the six months to the end of June yesterday also looked good: a 9 per cent increase in pre-tax profits to £10.1 million on a 27 per cent increase in revenues to £46.7 million. Within this, meter management revenues rose strongly, offset by a drop in installation fees mainly due to the end of a contract.
Smart Metering Systems has pitched but so far failed to win any contracts with the Big Six suppliers, most of which look set to install and run smart meters themselves, but it has the growing market for independent energy providers pretty well stitched up.
It has ten, albeit non-exclusive, contracts, including with First Utility and Ovo, and it recently secured an exclusive deal with Good Energy. The independents account for about 11 million meters, or a market share of more than 20 per cent.
The pace of Smart Metering Systems’ growth is inevitably tied to consumers’ willingness to accept smart meters, but, with the chances of the government abandoning its programme all but non-existent, its overall expansion seems guaranteed.
The shares, off 13p at 595p yesterday, have suffered weakness recently, but nevertheless, at 37 times last year’s earnings and for a yield of less than 1 per cent, they are expensive. Its prospects are good, but are built in to the price.
ADVICE Avoid
WHY It has plenty of long-term potential but that is already in the price
Eland Oil & Gas
At first glance, Eland Oil & Gas comes with some large warning signals. First, its business is built almost entirely on finding, producing and selling oil located in Nigeria’s Niger Delta. This is one of the most politically risky areas of the world, where militants fighting for a greater share of the country’s vast oil revenues are not averse to attacking pipelines.
Then there is its presence on Aim, a more lightly governed junior market where the historical reputation for good governance of oil and gas is, let’s say, patchy.
Look a little closer, though, and many of these concerns start to fall away. Militants mainly target multinationals and in the six years that Eland has been operating in the country it has not suffered an attack. Second, its eight-strong board and its team of senior managers are packed with energy industry experience, including engineers and geologists, as well as, to be frank, dull financial experts and accountants.
Eland Oil & Gas was founded in 2009 and listed on Aim in 2012. Its two main assets are 40 per cent interests in two fields: Opuama, a little exploited area containing a prospective 254 million barrels of oil, and Ubima, a far smaller field that could contain about 31.1 million barrels.
In an update yesterday, Eland said that tests in two wells in Opuama had progressed in line or better than its forecasts. The tenth of 11 wells is on course to produce more than 5,500 barrels per day, taking output from the field to more than 29,000 barrels a day, up from 3,000 15 months ago. Subject to testing, the 11th should add 4,000 to 6,000 barrels daily.
Its well in Ubima began producing, at a rate of up to 2,500 barrels a day. In response the shares rose 7½p, or more than 6 per cent, to 123p. The potential for Eland is rich. At the present rate, it would take close to seven years to exhaust proven reserves in Opuama, by which time it is likely to have made progress elsewhere. It is a risky business, but the excitement has helped to more than double the share price in the past year. Trading at about 3.5 times this year’s forecast earnings, the stock is still cheap, albeit without a present dividend. Only for the unafraid.
ADVICE Buy
WHY Production ramping up well and prospects look sound
