Energy all Action

Management at the energy consultancy is increasing scale in a fragmented market.

The share price of corporate energy consultants Energy Action (EAX) has increased 10% to $3.30 since announcing the relatively small $4m acquisition of Exergy – a specialist energy efficiency business - on March 13. On top of the acquisition, the investor interest was likely sparked by expectations the company will have a much stronger second half due to the large amount of corporate customers renewing electricity contracts over the next 12-18 months.  Eureka Report recommended Energy Action (EAX) as a BUY on January 15 this year.

Looking at Exergy first: while it is only $4m, the acquisition is expected to be instantly 11% earnings accretive and dramatically increase the capabilities of the sustainability division. The purchase will be funded from existing cash with $2m upfront and $2m over the next 24 months conditional on performance. The EV/EBITDA multiple is a reasonable 5.4, and doesn’t include cross-selling benefits.

Exergy will complement EAX’s existing sustainability division. The company services include assessments, ratings (NABERS, Green Star), building design and performance simulation. 

Management is executing its strategy to increase scale with EAX’s sustainability division increasing from 20 to 50 staff. In a fragmented market, there are many other smaller acquisition opportunities that will continue to create value for EAX shareholders.

Current Exergy managing director Dr. Paul Bannister established the company in 1999, and will lead the EAX sustainability solutions division. Bannister was the technical developer of the NABERS Energy and Waters Ratings, and brings significant IP to EAX. NABERS is a performance-based environmental impact rating system for existing buildings in regards to energy efficiency.

The sustainability division contributed approximately 15% to company earnings in FY13. With the previous government clean energy grants, the company had short-term expectations of 100% annual growth within the sustainability division. Now with the grants removed, all work is focused on creating a commercial return for customers. Even without the government grants, the divisional growth is still at 50%, displaying clear evidence that value can still be provided to customers through its energy efficiency service.

Contract Renewal Opportunity

Elsewhere, the largest company driver remains the opportunity to gain new customers through the contract renewal opportunity. As previously discussed, 90% of customers and target customers have to renew electricity and gas contracts over the next 12-18 months, as until recently the market wouldn’t price contracts past 2015 due to uncertainty over the carbon tax.

Since last year, thanks to the company initiative of pricing carbon-exclusive contracts there is demand and pricing available into 2017. A 20 percent increase in sales staff leaves the company well-positioned to gain significant market share over the next 1-2 years.

Due to the current weak pricing there is large demand from customers to lock electricity pricing in for as long as possible. With retailers preferring to bid on larger volumes, the company has created a “buddling auction” to be held in April. The idea is to combine as many customers as possible, enabling them to lock in the lower prices.  Through the company’s unique online auction it is estimated that 2-3 usual months of volumes may be captured in April.

While lower energy prices results in reduced revenue for EAX, the company has increased its brokerage fee from 1.5% to 1.95%. The fee increase still leaves the company at a discount to broking competitors, which is an attractive offering considering the unique benefits to customers of the online reverse auction – that is a platform connecting the customer to the most competitively priced retailers. 

We maintain our BUY recommendation with a $4.35 valuation and price target.

Earnings Forecasts
EAX - $3.3FY13FY14FY15FY16
Revenue$m22.228.037.041.0
EBITDA$m7.47.510.011.5
EBIT$m6.66.69.210.7
NPAT (adj.)$m4.95.06.78.2
EPScps19.419.426.031.7
DPScps8.78.71317
PE ratiox17.017.012.710.4
Dividend Yield%2.6%2.6%3.9%5.2%
EV/EBITDAx10.910.88.17.0

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