TIDMSMS
RNS Number : 8943F
Smart Metering Systems PLC
12 March 2020
12 March 2020
This announcement contains inside information for the purposes
of article 7 of EU Regulation 596/2014
Smart Metering Systems plc
MINORITY ASSETS DISPOSAL TO RAISE GBP291M
ENHANCED LONG-TERM, RPI LINKED DIVID POLICY
Smart Metering Systems plc (AIM: SMS, the "Group", "SMS") has
conditionally sold a minority of the Group's meter assets (the
"Disposed Portfolio") to funds managed by Equitix Investment
Management Limited (the "Purchaser") for a total gross cash
consideration of GBP291 million (the "Disposal"). The Group expects
to receive net cash consideration of GBP282 million, after
expenses.
The Disposal will enable the implementation of an enhanced
long-term, sustainable dividend payment policy and results in a
significant reshaping of SMS's capital structure.
As previously notified the Group is announcing its FY2019
results on 17 March 2020 and can confirm FY2019 results continue to
be in line with market expectations.
HIGHLIGHTS
-- Disposal
o Attractive valuation for a minority of the Group's meter
assets
o The cash consideration will result in positive net cash
position for the Group overall on completion
o SMS to continue to manage the Disposed Portfolio on behalf of
the Purchaser
-- Revised dividend policy
o Proposed dividend of 25p per share for FY2020, increasing at
least in line with RPI p.a. until FY2024
o Proposed scrip alternative for up to 30% of dividend
o Prudent cash cover expected in all years; earnings cover grows
over time
-- Ongoing capital structure
o Existing debt fully repaid; amended GBP300 million RCF on the
same terms
o Intention to maintain a prudent net debt / EBITDA ratio
through the remainder of the roll-out
o Flexibility in funding further growth in a capital efficient
way
-- UK smart meter roll out opportunity
o Existing portfolio of over 1.2 million domestic smart meters at 31 December 2019
o Order book of a further 2 million meters expected to add c.GBP40 million to the Group's ILARR
o Additional opportunities beyond order book with contracted and potential customers
o Following BEIS' proposed consultation to extend the deadline
to 2024, the smart meter roll-out profile is expected to be more
evenly spread, enabling SMS to manage its cost base more
efficiently
Alan Foy , Chief Executive Officer, commented:
"This transaction realises considerable cash returns and
demonstrates the substantial value of our smart meter
portfolio.
"It also will enable us to enhance greatly shareholder value
with significant and sustainable increase in dividends -
underpinned by our asset-backed, inflation-linked, recurring
revenue stream.
"With a strengthened balance sheet, we will also be in a much
stronger position to invest in the sizeable UK smart meter rollout
programme, which is central to the establishment of a decentralised
and decarbonised energy system."
Achal Bhuwania , Deputy Chief Investment Officer for Equitix,
said:
"We are very pleased to participate in the UK smart metering
programme whilst creating a long-term partnership with SMS. This
acquisition aligns with our business objectives of investing in the
country's sustainable energy transition initiatives, which we are
excited to be part of."
There will be an analyst conference call at 8.15am today -
please contact sms@instinctif.com or telephone 020 7457 2077 for
details.
Enquiries:
Smart Metering Systems plc 0141 249 3850
Alan Foy, Chief Executive Officer
David Thompson, Chief Financial
Officer
Dilip Kejriwal, Head of Investor
Relations
Cenkos Securities plc (Nomad and 0131 220 6939 / 020 7397
Joint Broker) 8900
Neil McDonald / Pete Lynch
Investec Bank plc (Joint Broker) 020 7597 5970
Christopher Baird / Henry Reast
Instinctif Partners 020 7457 2077
Adrian Duffield / Kay Larsen /
Chantal Woolcock
OVERVIEW
The Disposal of a minority of the Group's meter assets portfolio
demonstrates the inherent value of SMS's meter assets and enables a
significant reshaping of SMS's capital structure. It substantially
enhances shareholder value through the implementation of an
enhanced long-term, sustainable dividend policy during and after
the meter roll out phase.
The Board intends to maintain a prudent net debt / EBITDA ratio
of 3x - 4x through the remainder of the roll-out. The Group has
flexibility in the funding of its future growth in a capital
efficient manner.
The information below provides further details on the Disposal
(and the financial effects on the Group), the Group's revised
dividend policy, the revised capital structure, SMS' current
trading and outlook and the expected financial effects of the
Disposal.
THE DISPOSAL
On 31 July 2019, SMS announced that it was exploring options to
monetise the value of a minority of the Group's meter assets. On 17
September 2019 and on 31 January 2020, SMS reiterated that "the
Group continues to be in discussions regarding the sale of a
minority of the Group's meter assets".
On 11 March 2020, SMS entered into a put and call option to
subsequently sign a sale and purchase agreement (the "SPA") with
funds managed by Equitix, pursuant to which it has conditionally
agreed to sell the entire issued share capital of Crail Meters
Limited to the Purchaser for total cash consideration of GBP291
million (before transaction costs).
Crail Meters Limited is a wholly owned subsidiary of the Group
whose sole assets are the Disposed Portfolio, being c.187,000 meter
assets from the Group's I&C meter portfolio which, as at 31
December 2019, generated ILARR of c. GBP18.4 million and had an
average asset life of c.4.7 years.
Following the deduction of transaction and other expenses, and
subject to Completion, the Group expects to receive net cash
consideration of GBP282 million.
The Disposal is expected to result in a gain on Disposal of
GBP193 million (after expenses) which will be reflected in
Exceptional Items in the Group's Annual Accounts for the year to 31
December 2020.
The Group continues to be a market leader in the I&C market
through its retained meter asset portfolio, successful
multi-utility metering connection business and meter exchange
programmes and the ongoing management of the disposed meter
portfolio under its existing contractual arrangements with energy
suppliers.
SMS and the Purchaser have also entered into a Technical
Services Agreement and a Management Services Agreement, pursuant to
which SMS will continue to manage the Disposed Portfolio on behalf
of the Purchaser and will receive annual RPI-linked recurring
management fees totalling approximately GBP0.8 million in the first
year following completion of the Disposal.
Completion is currently expected to occur on 22 April 2020,
pursuant to the transfer of the consideration proceeds from the
Purchaser.
The gross consideration of GBP291 million, after adjusting for
the assumed management fee to be received by SMS, implies an
attractive valuation for the Disposed portfolio.
Rationale for the Disposal
The extension of the UK Government's domestic smart meter
roll-out target in September 2019 has provided energy suppliers
with greater timing flexibility than before, and SMS now expects
the installation profile to be more evenly spread through until the
end of 2024 as a result. This has also enabled SMS to review and
optimise its capital structure and seek to accelerate shareholder
distributions.
The key rationale for the Disposal are as follows:
-- Accelerate growth in meter assets: Existing c.2 million smart
meter order book and potential pipeline beyond - overall market had
c.37 million meters to be exchanged at 30 September 2019 (latest
publicly available information)
-- Resets Group leverage: The Disposal fully resets the Group's
leverage, resulting in a positive net cash position
-- Accelerate dividends: The Disposal allows the Group to pay
notably-increased dividends supported by its significant retained
asset base with highly sustainable and annuity-style cash flows
-- Demonstrates value: The Disposal reinforces the attractive
nature of the UK meter asset class, due in part to its index-linked
long-term cash flows with very limited maintenance or throughput
risks.
REVISED DIVID POLICY
The Group's dividend policy to date has been one of aiming to
provide a progressive, through-cycle dividend that shared the
rewards of SMS's profitability and growth with shareholders, whilst
continuing to invest substantial sums in the smart meter
opportunity.
SMS paid a final cash dividend for FY2018 of 3.98 pence per
share (an increase of 15% on 3.46 pence per share in FY2017) and an
interim cash dividend for FY2019 of 2.30 pence per share (an
increase of 15% on 2.00 pence per share in FY2018).
The FY2019 results are due for publication on 17 March 2020.
However, the Board is currently minded to propose a final dividend
for FY2019 of 4.48 pence per share, giving a total for 2019 of 6.88
pence per share.
The unlocking of value from the Disposal will enable the Board
to accelerate shareholder distributions by proposing a revised
dividend policy, which seeks to provide SMS shareholders with a
long-term and secure dividend pay-out, underpinned by the Group's
highly sustainable, annuity-style cash flows.
Under the proposed revised dividend policy:
-- 25p per share dividends proposed for the year ending 31
December 2020 ("FY2020")
-- dividends to increase at least in line with RPI every year
until the end of FY2024
-- proposed scrip alternative for up to 30% of future dividends
allowing SMS shareholders to choose between short term cash and
further investment in SMS equity
The Board believes that the revised dividend policy will
appropriately balance the needs of SMS stakeholders and the ongoing
capital structure and future funding requirements of the Group.
Further detail on the proposed revised dividend policy is
summarised below:
-- The anticipated total cash dividend of 25 pence per share for
FY2020 represents an increase of 3.6x on the proposed total 6.88
pence per share for FY2019.
-- Based on the current issued share capital of approximately
112.5 million shares, this equates to an annual total dividend of
approximately GBP28.2 million.
-- The dividend of 25 pence per share is expected to be payable
to SMS shareholders in four equal cash increments of 6.25 pence per
share in each of October 2020, January 2021, April 2021 and July
2021 as multiple interim dividends to provide shareholders with
regular payments.
-- The total dividend is anticipated to increase at least in
line with RPI (at 31 December for the prior year end) in each of
FY2021, FY2022, FY2023 and FY2024. If RPI is negative, no change is
anticipated to be made to the 25 pence per share, or then
equivalent amount.
-- A level of cash cover from operations of c2.0x is expected to
be maintained, increasing over the growth phase with earnings cover
expected to improve over time.
The Board intends to propose at the forthcoming Annual General
Meeting the establishment of a scrip alternative to SMS
shareholders for up to 30% of the dividend. This optional
alternative enables SMS shareholders to receive new fully paid
ordinary SMS shares instead of cash dividends and so increase their
shareholding in SMS without incurring dealing costs or stamp duty.
Further details are included in Appendix I.
A combination of residual long-term cash flows, significant
attractive growth opportunities coupled with a variety of funding
options provides SMS with several levers to rebase dividends in the
future.
REVISED CAPITAL STRUCTURE
Subject to completion of the Disposal, the net cash
consideration will be applied towards the immediate repayment of
amounts outstanding under the Group's existing GBP420 million debt
facility and will result in a positive net cash position.
Concurrent with the Disposal, the Group has amended its existing
revolving credit facility with a syndicate of lenders from GBP420
million to GBP300 million on the same terms. The key terms of the
facility remain unchanged, with key metrics being a leverage
covenant of 5.75x net debt to EBITDA and a current interest rate
margin of 185bps over 3-month LIBOR.
SMS intends to maintain future leverage at prudent levels and
the Board believes it will have flexibility in funding future meter
growth.
UPDATE ON UK METER ROLL OUT OPPORTUNITY
The roll-out of smart meters is a key element to the UK
achieving government targets for net carbon neutrality.
The political commitment to the smart meter rollout, built on
the economic and environmental business case, has been reaffirmed
by BEIS's intention to introduce compulsory annual installation
targets on the energy suppliers between 2021 and 2024. BEIS's
consultation is a tougher backdrop, though over an extended time
period, for energy suppliers.
The "Radio Frequency" interference issues in the Northern region
has now been resolved, with SMETS2 meters being installed in
increasing volumes during the latter part of 2019. With an extended
rollout timescale, we continue to work closely with all our
customers to mobilise and deliver their rollout requirements. For
instance, some independent energy suppliers are still finalising
integrations with the Data Communications Company ("DCC") and
end-to-end testing, with readiness to commence mass SMETS2 meter
rollouts at varying stages of development. We expect the roll-out
profile to be more evenly spread until 2024. The Group will take
this proposed extension into account when reviewing its
depreciation policy over the traditional meter portfolio and will
update the market when a conclusion is reached.
SMS has an orderbook of c.2 million meters which will add a
further c.GBP40 million ILARR or c.GBP21 million net growth after
GBP19 million of traditional meter rental is removed on exchange
over the rollout period. Additional opportunities exist beyond the
order book with contracted and potential customers. With a full
turnkey end-to-end delivery platform, SMS is well placed to
maximise opportunities in the UK smart metering space.
CURRENT TRADING AND OUTLOOK (EXCLUDING IMPACT OF DISPOSAL)
SMS is due to publish its results on 17 March 2020 with the
Group's financial and operating performance in line with the
trading update published on 31 January 2020.
FINANCIAL EFFECTS OF THE DISPOSAL
As at 31 December 2019, the net asset value (unaudited) for the
Disposed Portfolio was c. GBP89 million.
The net cash consideration of GBP282 million represents a
positive gain on disposal of approximately GBP193 million, which
will be reflected in Exceptional Items in the Group's accounts for
the year ending 31 December 2020. This gain is expected to
significantly increase the distributable reserves of SMS, once the
relevant audited accounts have been published.
For the year ended 31 December 2019, the unaudited underlying
PBT for the Disposed Portfolio was GBP10.9 million.
The Disposal, after adjusting for expected pro forma interest
costs savings on repaid indebtedness and receipt of the management
fee (GBP0.8 million p.a. in the first full year), is expected to be
dilutive to underlying earnings per share in the year ending 31
December 2020. These statements are made before any redeployment
over time of the net proceeds of the Disposal into value accretive
activities by SMS.
SMS's effective tax rate for the year ending 31 December 2019 of
26.8% is not expected to change as a result of the Disposal.
Excluding one off transactional deal costs, the effective tax rate
returns to a more normalised rate of 19.6%.
Notes to Editors
1. Smart Metering Systems plc ("SMS"):
SMS plc (www.sms-plc.com) installs smart meters and data loggers
that facilitate effective energy management and a low carbon
future. Established in 1995, SMS provides a full end-to-end service
for metering financing, installation, management and maintenance,
with a highly skilled workforce and deep engineering expertise.
SMS had installed 3.7 million meter and data assets as of 31
December 2019. SMS' smart meter expertise also enables the Company
to provide consultancy services that allow organisations and
corporates to enhance long term efficiency and effectiveness in the
management of energy.
SMS's energy management and asset installation services also
include infrastructure design, installation, consultancy and
project management services for new gas, electricity, water and
telecoms connections for licensed energy and telecoms suppliers,
end consumers and the UK's licensed electricity Distribution
Network Owners (DNO's).
SMS employs in excess of 1,200 people across the UK who support
the installation and ongoing management of metering assets.
SMS plc is headquartered in Glasgow with 12 locations across the
UK.
SMS's shares are listed on AIM.
2. Equitix Investment Management Limited ("Equitix"):
Founded in 2007 and headquartered in London, Equitix is a
leading infrastructure investment firm that manages over GBP5
billion on behalf of long term investors, including a large
proportion of UK pension funds. We manage six core infrastructure
flagship funds, 15 co-investment funds which are dedicated to
larger infrastructure projects, and a number of segregated managed
accounts providing customized solutions. Our investment strategy
focuses on core infrastructure projects, predominantly located in
the UK and covering a wide range of sectors with a particular focus
on social infrastructure, transportation, regulated utilities and
renewables. Across all of our core funds, we seek to hold assets
for the life of the fund, which is typically 25 years. We have
acquired over 280 core infrastructure projects since our inception,
thereby establishing a strong reputation as a trusted partner,
operator and fiduciary fund manager.
3. Cautionary Statement:
This announcement contains certain statements, statistics and
projections that are or may be forward-looking. The accuracy and
completeness of all such statements, including, without limitation,
statements regarding the future financial position, strategy,
projected costs, plans and objectives for the management of future
operations of Smart Metering Systems plc and its subsidiaries is
not warranted or guaranteed. These statements typically contain
words such as 'intends', 'expects', 'anticipated', 'estimates' and
words of similar import. By their nature, forward-looking
statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future.
Although Smart Metering Systems plc believes that the expectations
will prove to be correct. There are a number of factors, many of
which are beyond the control of Smart Metering Systems plc, which
could cause actual results and developments to differ materially
from those expressed or implied by such forward-looking statements.
This announcement contains inside information on Smart Metering
Systems plc.
4. Person responsible:
The person responsible for arranging the release of this
announcement on behalf of Smart Metering Systems is Craig
McGinn.
APPIX I
Further details of the proposed scrip alternative.
It is intended the scrip dividend reference price will be
calculated as the average closing mid-market price of an SMS
ordinary share for the five dealing days commencing with, and
including, the ex-dividend date.
The operation of this alternative will always be subject to the
Board's decision to make an offer of new fully paid ordinary shares
in respect of any particular dividend; should the Board decide not
to offer new shares in respect of any particular dividend, cash
will automatically be paid instead.
No fraction of a new share will be issued and calculation of
entitlement to new shares will always be rounded down to the
nearest whole new share.
The alternative is subject to SMS's Articles and these terms and
conditions, as amended from time to time, and is governed by, and
its terms and conditions are to be construed in accordance with,
Scottish law. By electing to receive new shares under the
alternative, SMS shareholders agree to submit to the exclusive
jurisdiction of the Scottish courts in relation to the
alternative.
SMS Shareholders who are resident outside the UK may treat the
optional alternative as an invitation to receive new ordinary
shares unless such an invitation could not lawfully be made to such
shareholders without compliance with any registration or other
legal or regulatory requirements. It is the responsibility of any
person resident outside the UK wishing to elect to receive new
ordinary shares under the optional alternative to be satisfied that
such an election can validly be made without any further obligation
on the part of SMS, and to be satisfied as to full observance of
the laws of the relevant territory, including obtaining any
governmental, regulatory or other consents which may be required
and observing any other formalities in such territories and any
resale restrictions which may apply to the new shares. Unless this
condition is satisfied, such shareholders may not participate in
the optional alternative.
SMS may consider (subject to the appropriate shareholder
approvals being in place) the option to buy back its own shares up
to the amount of the scrip issuance to help manage dilution over
time.
Further specific details on the scrip alternative will be
provided in future announcements and/or shareholder
communications.
This information is provided by RNS, the news service of the
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END
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