Fulcrum Utility Services: Short Term Revenue Delay

Operational changes made in FY12 benefited Fulcrum Utility Services (FCRM.L) the interim figures, which demonstrated a significant improvement over H112. However, the outlook for revenue growth appears less favourable than the market had been expecting. We have reduced our outlook for revenue and profits in the second half of FY12/13 and FY13/14.

Progression evident
The significant changes made by Fulcrum in FY12 can be seen to have benefitted the H1 figures. Despite broadly flat revenue, H1 results, helped by year-on-year mprovements in the gross margin (from 29% to 40%) and a reduction in administrative expenditure, from £9.4m to £7.9m, saw underlying EBITDA rise to £1.1m (H112: -£2.4m). The loss before tax also shrank, from £3.8m in H112, to £0.1m. Fulcrum maintains a healthy net cash balance of £4.4m.

Short-term revenue delay
Fulcrum has experienced a delay, beyond that foreseen at the time of the recent trading statement, in converting contracts into sales, as larger customers, in particular, have deferred capital expenditure decisions and this has hit our near term forecasts. This trend has been exacerbated by the revenue profile becoming inherently more volatile as a result of Fulcrum winning larger contracts (60% increase in contracts over £100k in H1) although their timing is more difficult to predict. Management expects some pick-up in revenue in H2 and the order book has grown by a third, to £20m. However, due to these delays management now believes results will fall below previous market forecasts. In light of the H1 revenue performance, the continued depressed state of the housing and construction market and management comments, we have lowered our forecasts to reflect a more cautious outlook for revenue and profitability in the short to medium term.

Valuation
While uncertainty surrounds the trajectory of revenue in the short term, a reduced cost base and improved processes will help underpin Fulcrum’s business and facilitate the move towards profitability and cash generation. We continue to believe that Fulcrum is well placed to win a significant position in the utility connection market and the potential for higher profits and valuations exists if Fulcrum succeeds in signing significant contracts in the short term and/or succeeds in growing revenue beyond 2014. Based on our current forecasts Fulcrum could be worth c 18p/share using a DCF-based valuation.

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