Analysis: Green gains to help UK support services offset cuts

LONDON (Reuters) - British support services companies could gain some protection from expected severe cuts to public spending in next week's emergency budget by offering green services to social housing providers.

The government has already canceled or suspended almost 12 billion pounds ($17.8 billion) worth of projects from hospitals to roads, but has committed to introducing new legislation on improving energy efficiency in homes.

Analysts say the attempt to make landlords greener, especially in the social housing sector, presents a 1-billion pound a year ($1.5 billion) opportunity for smallcap services groups like Kier, Rok and Connaught.

"Green services are certainly an opportunity at the moment and the biggest opportunity for us is in the existing social housing market," said Paul Slater, one of Kier's sustainability managers.

To meet government carbon emissions reduction targets, housing providers are having to use a wide range of products and technologies, from roof insulation through to organic waste management and renewable energy, such as solar panels.

Almost a quarter of the UK's housing stock is owned by councils and housing associations and in 2008, the residential sector accounted for 24 percent of end-user greenhouse gas emissions, according to government statistics.

In the European Union, buildings account for 36 percent of greenhouse gases and the European parliament last month passed new legislation meaning all new buildings constructed after 2020 will have to be carbon neutral.

However, this does not apply to existing housing stock, unlike Britain's Carbon Emission Reduction Target (CERT) and the Community Energy Saving Programme (CESP), which force utilities and housing providers to reduce carbon dioxide emissions from homes.

KBC Peel Hunt analysts said the market was yet to fully factor in the importance of green services to the bottom lines of support services companies, adding they would likely "prove to be a deal-maker in more and more cases in due course."

While this could turn into "tangible" profit growth for firms such as Connaught, eaga, Spice and Mitie, the sector has slid this year on fear of cuts from a new government seeking to cope with a huge deficit.

Shares in Eaga, Spice and Connaught are down 6 to 16 percent so far this year, lagging a 6 percent rise in the FTSE 250 mid-cap index. Connaught currently trades at 10.4 times forecast 2010 earnings, compared with 8 times for eaga and 8.4 times for Spice, according to Thomson Reuters Starmine.

The fact that some investors see value in these companies at these prices was underlined this week, when Spice rebuffed a 200 million pound takeover approach from private equity firm Cinven.

PANELS AND PUMPS

Utilities are expected to spend around 1 billion pounds a year to meet CERT obligations while CESP is worth around 700 million over 3 years, with the spending split between utilities and local authorities.

"A good chunk of CERT work will be done in social housing," said KBC Peel Hunt's Henry Carver.

Connaught's largest division is social housing, with the unit reporting a 17-percent rise in profit on a 13-percent increase in revenues for the first half, and said it sees a "once in a generation opportunity" as public and private sectors seek to cut costs.

"With over 4.5 million homes, the social housing sector is being challenged to lead the way in improving the environmental performance of its existing stock through investment in retrofitting and refurbishment," the firm said.

Rival Mitie, which installs ground source heat pumps that draw heat from the earth, and solar panels, makes just 13 percent of revenues from social housing but is targeting "mid-to-high single digit" growth as clients seek to combat rising energy costs.

The UK, as part of its obligations under the Kyoto Protocol plans to meet a 34 percent cut in emissions on the 1990 levels by 2020 and from April 2010 began offering electricity feed-in tariffs of up to 41.3 pence per kilowatt hour (p/KwH) depending on the size and type of system used.

"The feed-in tariffs relating to photovoltaic are driving uptake and this market should expand further next year with similar incentives introduced for solar hot water," a spokeswoman for Mitie said.

The Renewable Heat Incentive, which the government hopes will encourage households to install solar thermal water heaters and ground source heat pumps, is due to start in April 2011.

Mitie is well placed to take advantage of government spending cuts and the move to a low carbon economy, said Collins Stewart, which has a "buy" rating on the stock.

Eaga, however, remains the most vocal in its drive to green services, offering insulation, heating systems and energy saving devices to customers, and with big plans for a solar photovoltaic project.

Under the project to install panels on the roofs of social houses, the owner of the panels will receive revenue from new renewable power subsidies, while the tenant gets free power.

It has already signed heads of terms with 12 landlords and is in talks with a further 40, meaning it has identified over 650,000 homes that could come under the scheme.

While solar power and heat pumps form the more exotic end of green services, however, firms are likely to focus initially on rather more humdrum offerings.

"The majority of the low-hanging fruit is insulation," said Carver, adding this makes up the bulk of what is being spent on CERT.

(Editing by Sitaraman Shankar)