SMC stacks up

Architecture and design group SMC, which works on major office, retail and residential projects in the UK, Eire and Europe, joined AIM via a £4.6 million placing in June with ambitions to consolidate this fragmented industry. Founder and chief executive Stewart McColl hopes that by creating a larger outfit, his company will be able to win bigger projects producing higher margins.

McColl founded SMC in 1996 and has delivered appetising organic growth in recent years by offering national coverage. This has allowed the group access to substantial and more profitable construction projects across a range of sectors and locations. Clients now include British Land, Canary Wharf Group, Morgan Stanley and Wm Morrison, amongst others.

‘We have already got the £100 million projects,’ explains McColl, ‘but there is another step-change in scale to come that will allow us access to projects worth £200 million, £300 million, £400 million and even £500 million.’ Increased scale pays off because larger projects are higher margin, with higher fee levels and longer timescales, helping SMC plan staff requirements more accurately.

Last November, ahead of the AIM float, SMC appointed ex-Wembley stalwart Sir Rodney Walker, who has brought recent AIM success stories like Goals Soccer Centres and Spice Holdings to market, as non-executive chairman. His presence and contacts have boosted the group’s cachet and, following the AIM listing, McColl is also keen to boost scale through acquisitions.

Shortly after the float, SMC completed the two acquisitions mooted in the prospectus – Corstorphine & Wright Hills Erwin, a Manchester
and Lancaster-based commercial architecture specialist, and Philip Lees & Associates, an outfit based in Leeds city centre, with a bumper proportion of revenues wrought from repeat business.

‘We are one of the few consolidators that I know of in this market,’ adds McColl, ‘and now that we are on AIM, we are after acquisitions that are far more significant in size.’

SMC recently cheered followers with an update on new deals. Among a plethora of £100 million-plus projects was work on new headquarters for Deeley Properties in Coventry, Sports Centres for Warwick County Council as well as developments for Pillar Properties and Canary Wharf.

Overseas work included manufacturing and office units in Slovenia, as well as a 290-bed InterContinental Hotel in Pakistan. There was also news of planning consent for a £50 million British Land office campus at Coventry.

2004 was exceedingly strong for SMC, with turnover lifted by 43 per cent to £8.1 million and pre-tax profits sparking up from £100,000 to £1.1 million. Gross margins were a healthy 50 per cent.

More recently, SMC unveiled extremely strong maiden interims to June, sending the shares sharply higher to 70.5p. These revealed a 255 per cent profits jump to £1.1 million on a 47 per cent leap in sales to £5.4 million. McColl was particularly pleased with the 260 per cent vault in earnings per share and a 140 per cent surge at the EBITDA level to £1.45 million, ‘especially since we only had 20 days worth of revenues from the two acquisitions completed at float in the numbers’.

He says subsidiaries are already enjoying larger scale project wins as part of the larger AIM group. 'We are looking at a few businesses that we might acquire, and as the business grows bigger, we'll be more equipped to handle PPP and PFI projects'.

Analysts envisage further profits improvement this year to £2.9 million, with sales climbing to £12.8 million. On those numbers, earnings of 7.1p leave the stock trading on an undemanding multiple of 9.9. We believe SMC offers high earnings visibility as well as tasty levels of repeat business, and we are strong buyers.