Although annual spending by UK fire and rescue authorities (FRAs) amounts to roughly £2.6 billion each year, the market remains one of the last bastions of the public sector to be virtually untouched by outside hands.

But, having won the only outsourcing contracts put out to tender, Reading-based AssetCo is a rare interloper. As a provider of support services to individual FRAs and national programmes, as well as an equipment manufacturer supplying all UK FRAs, it is in a prime position to close more deals.

AssetCo arrived on AIM in March last year through an £80.2 million reverse takeover by Asfare, a supplier of ladders to all 58 UK fire departments. It took the opportunity to top up cash resources with a £20 million fundraising at 145p. Investors were enthused by 20-year contracts already in place with the London and Lincolnshire FRAs for the provision of all their vehicle and equipment needs.

Strategy
Chief executive John Shannon, who led a 2005 buy-in management buy-out (BIMBO) of AssetCo’s emergency and fleet-related businesses, was the driving force behind the AIM move and is the architect of the group’s strategy.

Over recent years, the company has completed a number of tuck-in acquisitions, adding crucial links in the supply chain. As well as acquisitions, organic growth within the two long-term contracts has proved remarkably successful.

The total life value of its London contract was initially £292 million; it has since grown to £489 million. Likewise, the Lincolnshire deal grew in value from £59 million to £65 million during the six months to September 2007.

Sure to add fuel to the flames is the rumour that 12 other UK FRAs plan to outsource their equipment supply arrangements. Shannon estimates that the first deal could be worth around £300 million.

Outside the FRA market, two high-profile national contracts have been confirmed as up for public tender. The first is the New Dimension programme for the supply of
highly specialist emergency services equipment to deal with terrorist incidents, industrial accidents or natural disasters. Following months of competitive dialogue, there are four companies in the running. If successful, AssetCo, which already supplies products and services to the New Dimension programme, could be looking at a deal worth £130 million over 16 years.

The second national deal, Fireguard, is for the provision of a business continuity service of emergency fire crews to support FRA obligations under the Civil Contingency Act. A decision is expected by September.

Though the group is up against larger rivals for these deals, none can match its relationships and connections with this branch of the emergency services.

Management
Ulsterman Shannon, an affable 42-year old, built the largest independent commercial vehicle hire company in his homeland. He brought the business to the attention of AssetCo, which was impressed enough to buy it in 2003. Just two years later, his ceaseless drive led to the BIMBO that eventually took the company to AIM.

A crucial member of the management team that bought out the company in 2005 was chief financial officer Frank Flynn. He is a licensed insolvency practitioner, a former venture capitalist with Hambro Northern Ireland and an ex-corporate financier of the Industrial Development Board for Northern Ireland.

Non-executives include the highly experienced Tim Wightman, David Chisnall OBE, who brings many years of fire equipment industry experience and contacts, and City figure Adrian Bradshaw.

Prospects
Shannon has strengthened prospects with a number of acquisitions in recent months. Two of these have particularly enhanced the group’s hand within the New Dimension programme. More recent acquisitions, TVAC and UVM, have bolstered AssetCo’s specialist vehicles subsidiary, Papworth.

Longer-term growth prospects should be boosted by AssetCo’s human resources division, recently set up by the well-connected Jeff Ord, HM Inspector of Fire and with 40 years in the fire service. The reasoning is rock solid: of the £2.6 billion of FRA spend, 82 per cent goes on recruitment and training. ‘This is the really big opportunity for us,’ enthuses Shannon, ‘all of this is done in-house at the moment, but FRAs are facing new budgetary pressures, so they are open to new cost-effective solutions.’

Sales for the six months to September 2007 shrank from £52.9 million to £27.6 million as the company moved away from its non-core vehicle leasing operations, but profits fired up 213 per cent to £4.7 million and earnings grew 67 per cent to 5.5p.

Valuation
For the full year, KBC Peel Hunt has pencilled in sales of £63 million and pre-tax profits of £10 million, giving double-digit earnings growth to 11.9p. This places the shares on a forward price-to-earnings multiple of 15.9.

Estimates from house broker ABN AMRO are slightly higher, pointing to 12.2p of earnings per share this year and 15.6p next, for forward ratings of 15.5 and 12.1.
The multiples from both sources are looking fairly undemanding.

Furthermore, AssetCo reported significant growth in net assets to £33 million at the interim stage and continues to generate good levels of cash to help fund its development and support dividend payments – KBC Peel Hunt is looking for £18.5 million of operating cash flow to be generated this year, increasing to £26.5 million next year. The £11.9 million of cash in the bank reported at the half-year stage is expected to increase to £14 million by the end of the year.

Given its competitive strength in an attractive market in which spending is anything
but discretionary, long-term contracts, large deals waiting in the wings and upside from the embryonic recruitment division not yet reflected in the valuation, AssetCo is a strong buy.