MIDAS SHARE TIPS: Back meter installer Smart Metering Systems

Smart meters have been linked to fraud, frustration and failure. Some consumers say they don’t work. Some believe they are a security risk. And some say they have been strong-armed into adopting them.

It’s not a good look. And all these concerns need to be addressed, particularly as they belie what this kit is designed to do. Smart meters are supposed to help households manage their bills, and support has been quietly growing as energy costs have soared. The technology should also come into its own as the Government tries to encourage homes and businesses to use less power and reduce the risk of blackouts this winter. 

Smart meters show households and businesses how much energy they are using so it is easier to work out the big guzzlers – and the smaller ones too. The equipment has already been rolled out to around 30million homes, more than half the households in Britain. And the Government wants to go a lot further, mandating that at least 85 per cent of all homes should have one by 2025, as well as businesses up and down the country. 

Most of the kit is installed by the big energy firms, but Smart Metering Systems is an independent specialist, working with firms such as Octopus and Ovo to install and manage their smart meters. SMS shares are £8.93 and should move higher as the group works with its customers to fulfil Government ambitions and expands into other areas of the energy market. 

SMS owns the meters and rents them out to energy firms on an inflation-linked basis. Rents are relatively low – around £20 per year – but the long-term, inflation-linked nature of the contracts enables SMS to pay solid, dependable dividends to investors. 

The company has already installed 1.9million smart meters and energy firms have ordered another 2.4million, around 2million of which will be installed by 2024. As chief executive Tim Mortlock puts more meters into homes and businesses, SMS sales and profits rise. 

Half-year figures are out this week and should show strong growth. A trading update last month was upbeat and brokers expect full-year sales to rise by 7 per cent to £115million, with profits up 23 per cent to £20.6million. 

The dividend is set to climb nearly 11 per cent to 30.3p, putting SMS on a solid 3.4 per cent yield. Reassuringly too, the company intends to deliver further double-digit increases in the payout for at least the next two years, backed by longterm contracts. 

SMS does not just own and install smart meters. The group also manages the data they collect. This is likely to prove a growing area as Government regulations stipulate that energy firms will soon have to collect half-hourly meter readings for companies and individuals. 

With years of experience in the field, SMS is expected to be appointed not just by existing smart meter customers but by other energy suppliers too. The company even supplies data services to large companies to help them with energy use and advice to consumers is on the cards as well. Brokers believe the company could generate up to £90million of profit from data services alone over the next few years. 

SMS has been moving into other areas of the energy market, including battery storage and electric vehicle chargers. The company recently opened its first battery storage plant in Burwell, Cambridgeshire, capable of storing 50MW of energy, enough to power hundreds of homes. These mega-batteries will prove critical as the UK tries to move from fossil fuels to renewable energy such as wind and solar, because they store power when the wind blows or the sun shines and release it on demand. 

SMS has a 760MW battery storage pipeline, which is expected to be rolled out over the next few years and is likely to generate significant sales and profits. EV charging is at an earlier stage, but the group already manages almost 2,000 chargers for local authorities, supermarkets and other businesses and hopes to build a 50,000-strong network over the next ten years. 

In the shorter term, SMS’s prospects are bright. Mortlock said last year that he expected to double earnings by 2026, implying profits approaching £35million with dividends rising in sync. Growth should continue well beyond that time as SMS generates increasing revenues from meters and battery storage and moves into related areas of the energy market too.

Midas verdict: Liz Truss has handed out a generous energy package to struggling households and businesses, but bills are still likely to be higher than last year and everyone will be urged to reduce consumption. Smart meters help with this ambition and SMS is a key player in the sector. At £8.93, the stock is a buy – and the dividends provide an attractive bonus. 

Traded on: AIM Ticker: SMS Contact: sms-plc.com or 0141 249 3895