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We recently initiated research coverage on Fulcrum Utility Services and met with Nexus Infrastructure. Both are listed on the AIM market and both operate in the utility connections space. We believe there are a number of attractions in this industry.

Contractors in the utility connections market typically achieve a higher margin than general contracting businesses. Utility connections are more technical and tend to involve a higher proportion of skilled labour vs. a higher proportion of tradespeople in general contracting. Nexus Infrastructure’s connections business (TriConnex – 33% of its operating profit) generates an operating margin of 12%, with Fulcrum’s (91% of operating profit) exceeding this at 16%.

Payment terms in the industry also tend to be attractive, with revenue from developers typically received either upfront or in staged payments in advance of work for each stage commencing. In a growing market, utility connections businesses therefore tend to generate cash.

Historically, all new buildings across the UK were connected to the gas and electricity grid by the now Fulcrum Utility Services as a subsidiary of British Gas then National Grid. In 2000, in order to increase competition in the distribution market, Ofgem established rules for independent companies to provide connections and own/operate installed electricity and gas assets.

Now, the utility connections market is highly fragmented, with a large number of independent operators. Competition is generally segment (i.e. gas or electric) or region specific.

Whilst the UK economy is only expected to grow modestly in the next three years (Bank of England expects UK GDP to grow at 1.7% in 2018, 1.8% in 2019 and 1.7% in 2020), we believe there are significant opportunities for utility connections operators which offer a multi-utility service across a number of geographies to win market share. On top of this, there are brighter spots of the UK market such as housebuilding activity which continues to grow ahead of the wider economy.

Both Fulcrum and Nexus have clear strategies to win market share and grow organically. With entrepreneurial and ambitious management teams, both companies are also exploring M&A opportunities.

Fulcrum Utility Services

Nexus Infrastructure

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