A resilient housebuilding market bodes well for engineering services

group Nexus Infrastructure (NEXS:AIM) which counts Countryside Properties (CSP), Taylor Wimpey (TW.) and Redrow (RDW) as customers.

Nexus owns Tamdown which builds roads, undertakes earthworks, creates drainage systems and constructs reinforced concrete frames for housebuilders, mostly in the south east of England and London.

Fast growing business

It also has a fast-growing utilities business called TriConnex which designs, installs and connects gas, electricity, water and fibre networks on residential and commercial developments.

Nexus is profitable and pays dividends with a yield in the region of 4.5%. It gets paid monthly by Tamdown clients and most payments for TriConnex are made before the commencement of work, so it has low working capital requirements.

Tamdown made an 8.4% operating profit margin in the year to 30 September 2016 versus 12.1% margin at TriConnex over the same period.

Nexus is new to the stock market, having only floated on AIM on 10 July. No new money was raised at the IPO (initial public offering); instead, directors and staff sold £35m worth of shares to provide liquidity in the market.

The majority of these shares were owned by chief executive Mike Morris and director Keith Breen who still hold a combined 43.1% stake. They have promised not to sell any more shares for at least one year.

Morris says earnings growth will come from Nexus winning more work, expanding geographical coverage and introducing new services such as it has recently done with electric vehicle charging points. He adds that Nexus is well advanced with trying to make an acquisition on the utilities side.

CF Livingbridge UK Micro Cap (GB00B55S9X98) is among the investment funds to have taken a stake in Nexus at the IPO. Its fund manager Ken Wotton says the utilities connection arm is the exciting bit of Nexus. ‘It has better quality earnings than
the infrastructure services division and the customers and routes to market are quite similar,’ he says.

Hitting its deadlines

‘The utilities services industry is very bad at doing stuff on time, so one of Nexus’ selling points is that it is good at completing connections to deadlines. That’s very attractive if you’re a property developer,’ adds Wotton.

Investors should be aware of some risks to the investment case. It is reliant on a small number of clients. Its top 10 clients accounted for 75% of revenue in 2016. Nexus’ fortunes are heavily tied to the housing market. Furthermore, it operates in a competitive market.

That said; its contract win rate is very impressive. Tamdown won one out of every 2.1 contract bids in 2016; TriConnex won one in every 3.4 bids in the same year. (DC)

Nexus Infrastructure (NEXS:AIM) 191.5p

Stop loss: 130p

Market cap: £72m

‹ Previous2017-07-13Next ›