Fulcrum Utility Services (FRCM:AIM) has won a £4m contract to install a new gas pipeline, yet there’s a twist to the story.
Although the work should be finished by spring 2018, it won’t get fully paid for another four years after the project completion.
In a bizarre move, Fulcrum’s contract is structured so that its fees aren’t paid until the client achieves cost savings from converting its existing fuel oil source to natural gas.
It will receive one lump sum of cash once the pipeline is completed and gas is running to a large food manufacturing plant in the South West. The remainder of the money will be paid in five annual installments, finishing in July 2022.
We’re told by Fulcrum’s advisers that the installation should take no more than 12 months.
ODD STRUCTURE
The contract structure looks odd, in our view. It is like going to a shop and saying ‘I’ll have that item, but I can only you pay you a bit now and again. You’ll get the money eventually’.
Fulcrum’s advisers argue the project is positive for the company on two accounts.
Firstly, it represents one of the service group’s largest contracts. Secondly, Fulcrum will own the pipeline and receive recurring revenue from tariffs paid on gas being transmitted to the factory. It will also operate associated gas meters.
Fundamentally we think Fulcrum looks very interesting, yet the latest announcement implies that investors will have to start to probe contract terms more thoroughly to understand the pace of future revenue.
STAR PERFORMER
The business has performed very well on the stock market in the past few years, rising five-fold in value since early 2015.
In September this year it said earnings before interest, tax, depreciation and amortisation (EBITDA) and net cash would be materially ahead of market expectations for the financial year to March 2017.
Half year results will be published on 6 December.
