Plenty Of Action In Energy
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Energy Action is a unique exposure, which – despite some uncertainty surrounding the carbon tax repeal – should continue to show solid growth.
Energy procurement and management company Energy Action Limited (EAX) is another unique beast on the Australian Securities Exchange (ASX).
Listed in October 2011 at $1 a share, Energy Action’s business revolves around reducing – or offsetting – the impact of rising energy prices for Australian businesses. The company has three main businesses:
• Australian Energy Exchange (AEX), which offers online energy reverse-auctions, similar to eBay: 16 natural gas and electricity suppliers bid against each other to supply the energy needs for EAX’s customers, with prices falling until a settlement is reached. Energy Action manages and conducts the auction and transfers the contract to the retailer that has won the business. Through this unique service, Energy Action says it has secured energy contracts worth more than $5 billion in total and delivered millions of dollars worth of savings for Australian businesses and organisations. EAX believes using the Energy Exchange creates savings of at least 7% for a customer.
• Activ8, an energy monitoring and contract management service designed to help businesses control and minimise their energy expenses, emissions and wastes, so as to achieve substantial savings and an improved bottom line.
• Activ8+, a consulting service to improve energy efficiency and reduce consumption by physically going into the customer’s business to identify what changes can be made.
EAX also runs Ward Consulting, acquired in 2012, which is a specialist sustainability reporting and efficiency solutions consultancy, and in March EAX bought Dr Paul Bannister’s energy efficiency consultancy Exergy. Bannister, founder of Exergy and the original technical developer of the NABERS (National Australian Built Environment Rating System) energy rating system, now heads EAX’s Sustainability Solutions division, which is the new name for Activ8+.
EAX, which is capitalised at $78 million, estimates that it manages about 10% of the energy used in the Australian commercial and industrial sectors, with 10,000 large market sites and 8,000 small sites under management. The business need that EAX meets is that incorrect energy bills cost Australian businesses thousands of dollars each year –it finds those inaccuracies, and gets a better deal.
Because of the jargon, technical information and complex calculations, energy bills can be confusing and difficult to understand for businesses. Discrepancies between what organisations should be paying and what they actually pay usually go undetected, resulting in excess payments ranging from a few dollars to hundreds or even thousands of dollars.
EAX says that many businesses in fact, do not even negotiate their energy contracts, as they believe they are not ‘contestable’ – with the result that they continue to be charged on high default rates.
Energy Action says that from its experience – analysing the energy bills submitted for bill validation through its contract management and monitoring services – one in five bills (21%) were incorrect in some way. On average, 13% of users were over-charged and 8% under-charged, with overcharges amounted to more than $74,000. The most common reason for overcharging was incorrect ‘line loss’ charges.
In the maiden full-year profit result (June 2012), revenue came in $17.1 million, short of the prospectus forecast at $17.3 million, but reported net profit, at $3.6 million, was 4% ahead of its prospectus forecast. Activ8 accounted for 63% of revenue in FY12, while AEX represented only 23%.
For the year ended June 2013, revenue rose by 28% to $21.9 million, while reported net profit was up 22% to $4.4 million. Activ8 generated 59% of revenue, with 25% coming from AEX, 9% from Activ8+ and 7% from Ward Consulting.
For the year just completed, EAX started out guiding the market to expect “operating net profit” – that is, net profit after tax but before corporate acquisition-related costs, amortisation of customer relationships and employee incentive plan non-cash expense – to be 10%–15% higher than in FY13, but in December it warned that operating net profit was more likely to be “in line with” FY13 operating net profit of $5 million. The main problem was the Sustainability Solutions division (the former Activ8+), which was having trouble meeting growth forecasts, being hurt by the removal of existing energy efficiency funding schemes that preceded the Abbott government’s introduction of its Direct Action Plan climate change policy.
This policy was, of course, accompanied by the repeal of the carbon tax. For small business and residential customers, the carbon tax is contained in a “bundled rate,” while for business customers it is either a carbon “inclusive” contract – where the tax forms part of the energy rates, that is, it is contained in the cents per kilowatt rates – or a carbon “exclusive” contract, where the tax appears as a line item on the bill.
This means that Energy Action has plenty of work on its hands from the repeal: because repeal does not necessarily result in automatic price reductions from the repeal date (1 July 2014), it may take some time for retailers to implement the carbon tax repeal in their billing systems. Energy Action is working with each retailer on its progress and methodology in repealing the tax: as it receives bills from the retailers, it is checking that they accurately reflect the intent of the repeal legislation.
Energy Action says businesses on exclusive contracts, which itemised the carbon tax, will see immediate savings now the carbon tax is gone, of about 10%–12%. But those on inclusive contracts –about half of Energy Action's clients – and big commercial energy users may not see these savings. In any case, says the company, an expected increase in gas prices in Australia may counter any savings made now the carbon tax is gone.
In any case, saving energy costs is an imperative – and that is the trend that favours EAX, the increasing bottom-line awareness that drives customers to them.
At December 2013, return on assets (ROA) was running at 36.2%, while return on equity (ROE) was a spectacular 43%. In the December half-year, EAX lifted revenue by 17% to $12.1 million, while reported net profit rise by 7%, to $1.9 million. The fully franked interim dividend, at 3.73 cents, up from 3.55 cents in the 2013 interim.
Energy Action currently has more than 16,000 auction sites under active or future energy contracts, having procured approximately $86 million in energy contracts in the first half of FY14. The Activ8 suite of services also performed strongly in the first half, with more than 8,800 sites now under active or future contracts.
Mainly as a result of the slowdown in auction revenue, future contracted revenue decreased 5% from $76.5 million at 30 June 2013 to $72.8 million at 31 December 2013. This significant future revenue stream underpins EAX’s growth and provides annuity-style income.
After the profit warning in December, which took expectations of FY14 profit back to a similar level as FY13, investors are waiting for the FY14 result to see if there has been an improvement. There are no broker forecasts on which to go for this stock. If earnings per share (EPS) come in at the same as for FY13, at 21.2 cents, the stock is trading on a price/earnings (P/E) ratio of 14.3 times earnings. Given the increase in the interim dividend, if the final dividend is the same as in FY13, at 5.1 cents, EAX should pay a dividend of about 8.83 cents, which would put the stock on a fully franked dividend yield of 2.9%. Energy Action is a unique exposure, which – despite some uncertainty surrounding the carbon tax repeal – should continue to show solid growth.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au