Smart Metering Systems (SMS:AIM) enjoys a 4.5% bounce as listed rival Energy Assets (EAS) receives a bid at a 40% premium to its share price at the close on Friday.

But the deal value multiple paid by private equity outfit Alinda Capital for Energy Assets doesn’t provide a flattering comparison for SMS, based on a quick review of the numbers.

Private equity firm Alinda Capital’s 685p offer for Energy Assets represents an enterprise value – which adds together a company’s market capitalisation and net debt – of around £267 million based on reported results to 30 September 2015.

Earnings before interest, tax, depreciation and amortisation (EBITDA) was £21 million in the 12 months to 30 September, for an EV/EBITDA multiple of 12.7 times.

SMS, which reported full year results on 21 March, trades at 17.3 times the same multiple.

That means SMS trades at a valuation an almost 40% higher than the 40% premium paid by Alinda for Energy Assets.

Other measures, including price-to-earnings ratio and price-to-book valuations, indicate the valuation gap is not as wide.

SMS - Comparison Line Chart (Rebased to first)

Support services analyst Michael Donnelly at Panmure Gordon believes there is decent value in SMS because of opportunities it has in the domestic smart metering market.

Both SMS and Energy Assets have historically focused on the installation of ‘advanced’ meters at commercial locations.

Plans to introduce smart meters for domestic energy users have suffered continued delays but once the programme gets going, Donnelly says, SMS is well positioned.

Listing five reasons to be excited about the opportunity, Donnelly writes:

> Downstream contracts are now being awarded (see Telit Communications contract here);

> Capita has been appointed project manager for the domestic smart meter roll-out;

> SMS has delivered successfully on the industrial and commercial (I&C) ‘land grab’;

> Last year’s general election has now provided political stability; and,

> All political parties support domestic smart meters in their manifestos, indicating political unanimity.

SMS’s premium valuation to Energy Assets may reflect this opportunity, because the latter had historically played down the role it expected to play outside the industrial and commercial energy meter market.

Donnelly says a free cash flow analysis indicates SMS could be worth as much as £10 a share in the 2020s if domestic metering plays out to its advantage and yields in its existing business hold.

Current forecasts produced by Donnelly on SMS indicate a more modest valuation of 565p a share, according to a January research note.

Acquisitions of two meter suppliers and an IT specialist business in March could add around 5% to existing forecasts, Donnelly adds, though the January note has not been updated.

SMS earnings per share for 2017 were forecast in January at 17.3p.

It currently trades at 430p.

Issue Date: 18 Apr 2016