Energy Action (EAX)
Although much of the detail was pre-announced, the market reacted negatively to the full-year result, which was slightly weaker than I had anticipated. FY14 was a year to transition the business to take advantage of the large contract renewal opportunity in 2015.
It was a case of some short-term pain for long-term gain. The pain was taken in the first half with a 20% increase in sales staff increasing costs. It also took some time for this increased sales team to restructure, with a profit downgrade for the first half to follow.
The contract renewal opportunity relates to the company’s online reverse auction platform. It gives customers the opportunity to offer their new gas or electricity supply contract for utilities to bid on. Before the end of 2015 approximately 75% of customers need to renew their contracts due to the prior uncertainty with the carbon prevented the market from pricing contracts past 2015.
This online auction is an important way to gain new customers, who can then be leveraged through the other parts of the business: Firstly the Activ8 contract management division and then the sustainability division.
The sustainability division has had to deal with the headwind of government uncertainty around renewables, however the division can still grow even without government support.
Management has identified a strategy of growth by acquisition in the fragmented market. The new management team is yet to prove its capabilities in both identifying appropriate acquisitions and then successfully integrating them into the business.
CEO, Scott Wooldridge, has had past experience with growth by acquisition models, and the market will be very keen to see evidence of his capabilities.
With this result the acquisition of energy consultancy business EnergyAdvice was also announced. The acquisition price of $12.5 million represents an expensive 9x average 2012, 2013 and 2014 EBIT. However, this was most likely due to the large amount of future contracted revenue.
2015 will be a make-or-break year for Energy Action, with expectations of strong growth from both the contract renewal opportunity, and the synergies and cross-selling opportunities from acquisitions.
I am maintaining my Buy recommendation, however the valuation and price target has reduced from $4.35 to $3.90. The valuation decline is due to a reduction in short-term margin assumptions from the recent acquisitions.
ToxFree Solutions (TOX) has been the most disappointing out of all my companies that have reported so far. The weakness in the second half margins was due to a smaller contribution from Gorgon and setup costs for the new Chevron contract.
In terms of the key numbers, and their relative misses - Revenue of $370 million was 4% below my forecast of $385 million. Underlying EBITDA of $66.6 million was 6% below my $71 million forecast, and net profit after tax was 19 percent below my $28.5 million forecast. The full year dividend increased by 20% to 6 cents or an approximate 2% fully franked yield.
Tox is one of the largest industrial service and waste management businesses in Australia. Over a number of years the company has very successfully grown by acquisition in carefully selected strategic resources focused locations. The national footprint provides a diverse range of industrial and waste services to all market sectors. The unique licenses and specialist technologies acts as a strong barrier to entry. Other factors that act as a competitive advantage include their track record of safety, service delivery, sustainable waste management practices, and an integrated waste management service offering.
Wanless was acquired in May 2013, and is part of the waste services division. This division comprises 60% of EBIT, and produced solid FY14 growth of 23%. However, there was margin decline from 20% to 18.3%. There is some uncertainty around the setup costs and margins that can be achieved from the new 5 year Chevron contract.
Technical and Environmental service was the strongest division comprising 26% of group EBIT, with margin strength producing a nine percent increase.
Industrial services was flat with fleet utilization levels lower due to a lack of major infrastructure projects and client maintenance spend was also lower.
TOX has minimum exposure to mining capex, with a majority of resources exposure related to assets in production.
Despite the weakness in this result, TOX is an excellent business with medium-long term growth potential due to its strong market positioning and defensive earnings profile. Managing Director Steve Gostlow leads a management team with a first class track record for delivering on its strategy, and providing excellent long term shareholder returns.
My FY15 earnings forecast has declined by 18%, and FY16 by 13%. At $2.94 TOX is on a FY15 PE of 16, and FY16 PE of 13. The discounted cash flow valuation and target price has reduced from $3.80 to $3.40.
I am downgrading my recommendation from Buy to Hold, due to the reduced forecasts and a lack of visibility around the earnings margins and timing of some key East Coast infrastructure projects.
For ToxFree's forecasts and financial summary, click here.