Barclays has initiated coverage of Smart Metering Systems PLC (LON:SMS) with an 'equal-weight' rating and a 640p price target, highlighting roll-out concerns.
In a note to clients, the bank’s analysts said: “Whilst SMS has a clear pipeline to significantly grow its installed base of meter assets, we think the returns from this roll-out are uncertain.”
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They noted that the initial rental yield SMS has been achieving on new meter assets has been falling to around 11% from around 20% as volumes have increased and there has been a transition from Industrial & Commercial to more commoditised domestic meter installations.
The analysts said that whilst at lower yields, a positive return on investment (ROI) is still guaranteed by termination clauses, a large return is now far more dependent on a long meter life – 25-plus years.
They added: “In theory, smart meters should not need replacing for decades but we are cautious of making this our base assumption noting: 1) the UK regulator only assumed a 15-year life in its Cost Benefit Analysis; 2) SMS depreciates its meters over 20 years; and 3) meter manufacturers cite replacement cycles of anything between 5-30yrs.”
The analysts said: “Getting comfortable that a 25+yr meter life is a prudent base assumption is key for us to become more positive on the shares.”
They added: “We are less worried about further declines in yield, noting that pricing is set for the majority of the installed base in our base case and meter cost should be stabilised by competition.”
In afternoon trading, SMS shares were changing hands at 586p each, down 2.3% on Tuesday's close.