Maiden interim result

Energy management experts, Energy Action, delivered a very good interim profit result – its first as a listed company. The market opportunity to manage and improve company energy requirements and usage is huge. Energy Action has a proprietary auction system that can help businesses save significant amounts of money as well as manage their on-going requirements.

“The resulting contract typically knocks around 10-20% off a customer’s energy bill just through the competitive tension the online model creates”

Energy Action’s interim profit jumped 14.76% to $1.745 million on 18.8% revenue growth. The company declared an interim dividend of 3.48cps fully franked to be paid on 13 March.

Operating cash flow jumped 67.6% to $2.17 million.

Businesses such as McDonalds, PWC, Goodman Fielder and The University of Sydney are wising up to the benefits of outsourcing their energy management to Energy Action’s clever procurement platform that not only cuts their energy bills through its online reverse auction process but can offer smart management of on-going energy costs.

The business model that EAX has established over a decade is highly scalable and requires little development capital relative to the size of its market opportunity. This is what some analysts call a scale advantage and it most certainly provides leverage in that regard.

Energy Action has amassed around 5,000 sites under contract for the management of their energy requirements.

The company’s reverse auction process requires energy retailers to bid on a prospective customer’s energy supply contract starting from a proposed price on the Australian Energy Exchange website, owned and managed by Energy Action.

The bids are progressively lowered until the three lowest bids are put to the customer for final approval.

It also allows them to sign up for a contract length of their choosing, sometimes up to ten years or as little as a few months.

Energy Action can then audit and advise the company on their continuing energy usage to further optimise their consumption. This advisory role is a product known as Activ8 and can further reduce a company’s energy costs.

Good housekeeping practices can typically knock around 10-20% off a customer’s energy bill.

In addition, being experts on the energy industry, Energy Action can assist with the increasingly complex world of tariffs, energy taxes and reporting on greenhouse gas emissions among other things.

Energy Action can provide further advice on efficiency and sustainability services.

When we met with Managing Director Val Duncan this week, she told us the customer retention rate is conservatively above 90%. That’s strong evidence the service works well.

The catalyst for growth is the urgent need for companies to get greater control of their energy costs as prices continue to increase.

The approaching Carbon Tax has added further urgency for companies to understand and manage this aspect as well.

Energy Action has forward contracts estimated at over $60 million that will underpin earnings for several years.

The company has accumulated this future revenue stream without any real promotion of its services. Only recently has it begun marketing itself in a serious fashion and this could yield an even greater volume of work if executed well.

Energy Action's competitors are the energy retailers themselves and brokers who procure contracts via traditional tenders. But none of these have an online real time auction process. Various start-up websites are attempting to copy the service but will quickly find progress more difficult than anticipated given the expertise and knowledge required to replicate what Energy Action has achieved.

The company’s main capital expenditure requirement is on software development. They have recently rebuilt part of their system to cope with the burgeoning range of government (state and federal) charges such as the Victorian Energy Efficiency Tariff (VEET) which commenced on 1 January this year.

Of course, the federal government’s Carbon Tax regime has everyone’s attention and will add much complexity to company reporting requirements as well as cost considerations.

Energy Action has no debt and cash of $5.9 million. The company raised $3.2 million of equity at its ASX listing in October 2011.

We think the company is well on track for a full year net profit of $3.8 million, an increase of 30% - in line with its Prospectus forecast.

The company’s dividend policy is to pay 50% of net profit after tax. On that basis, we would expect the full year dividend to reach approximately 7.6 cents per share placing the stock on a fully franked yield of 6.4%.

We continue to recommend Energy Action as a buy to Members without exposure.

Fat Prophets assisted EAX in its IPO last year.