Micro-caps rarely feature as Great Ideas in Shares, but we have made an exception for civil engineering and infrastructure specialist Nexus Infrastructure (NEXS:AIM) which looks to be on the cusp of a change in fortunes.
It is only fair to point out that micro-caps tend to be more volatile, are less liquid to trade and have a wider spread between the buying and selling price than larger stocks.
Nexus trades an average of around 27,000 shares per day, equivalent to roughly £36,000, and has a dealing spread of some 7% between the bid and the offer price.
WHAT IS THE INVESTMENT CASE FOR NEXUS?
In a nutshell, the business is on its back, trading around breakeven on a cash flow basis, which makes it highly-geared to the first signs of an uptick in housebuilding activity.
Nexus is the equivalent of the canary in the coalmine for housebuilders, given it provides all the essential planning and preparatory works for new projects.
It’s main division Tamdown is currently carrying out infrastructure and ground works for long-standing customer Vistry (VTY) in Thanet, Kent.
In ‘normal’ times, the Tamdown business generates around £100 million of revenue with a 5% operating margin, whereas in 2024 it generated £56.7 million of revenue and operating cash flow of £0.5 million, reflecting weakness in the new-build market over the last two years.
In short, we believe there is potential for a sharp turnaround in its fortunes.
In its 2024 results (released 23 January), the company said it had seen a notable pick up in client enquiries in October.
Historically, enquiries tend to lead to engagement of new planning work with a delay of around three months according to the firm.
This was corroborated to some extent by the listed housebuilders, several of whom noted a ‘marked’ improvement in customer enquiries in their January trading updates.
This could lead to new developments opening more quickly than expected. Progressive equity analyst Alastair Stewart notes Tamdown has an ‘extremely short lead-in time’ to any uptick in new site openings by housebuilders.
Given the government’s aim to streamline the planning process and get more new homes built during the current parliament, and with interest rates heading lower, we believe former headwinds could easily turn into tailwinds.
A LEADER IN CIVIL ENGINEERING
Nexus has been operating for more than 48 years and serves the top five listed housebuilders, Barratt Redrow (BTRW), Vistry, Taylor Wimpey (TW.), Persimmon (PSN) and Bellway (BWY).
The group also serves many leading private groups and housing associations, providing services including earthworks, roads, drainage and foundations.
The company specialises in complex, multi-phase developments, which means it is particularly well-placed to benefit should the Labour government’s long-term plans to build ‘new towns’ come to fruition.
Key competitive strengths include a broad range of technical expertise and strong relationships with leading housebuilders.
Beyond housebuilding, the company is looking to diversify its revenue stream and in early 2025 it purchased water and rail infrastructure specialist Coleman Construction & Utilities Group which benefits from structural growth drivers.
Over the next five years water companies are expected to spend £104 billion to improve the environment and the resilience of the UK’s water supply and infrastructure.
NET CASH ALMOST EQUALS MARKET CAP
It is worth noting that in February 2023 Nexus completed the disposal of TriConnex, which provides utility connections for housebuilders, and eSmart Networks which provides power connections to industrial customers.
Both businesses were sold to private investment group FitzWalter Capital for £78 million in cash. Nexus subsequently returned circa £61 million to shareholders via a tender offer.
The company still has net cash of £12.8 million on the balance sheet, almost equal to its current market cap, the shares trade at less than half their 332p book value and they pay an ordinary dividend of 3p per share.
With all this going for it, we aren’t the least bit surprised to see legendary value investor Peter Gyllenhammar and Nat Rothschild listed as two of the top 10 shareholders.
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