Is Energy Action a powerful investment?

Energy Action (ASX: EAX) is a leading player in the fast-growing energy management sector. At present EAX is estimated to have only 5% of the available market, allowing plenty of scope for further organic growth. The energy management area is highly fragmented and ranges from solo consultants to listed companies such as Energy Action.

Founded by Valerie Duncan in a 2002 management buyout, EAX has since achieved historic growth rates of 25%pa; listing on the ASX in late 2011. Valerie Duncan is in the process of retiring but will remain on the board as a non-executive director. The company has two major divisions:

Australian Energy Exchange – estimated 25% of revenues

Basically a ‘reverse auction’ platform (bidders are suppliers competing for contracts), AEX is a real-time experience where prospective purchasers can see the details of bidders, prices offered and the extent of competition on their screens.

There are several safeguards in place:

  1. AEX scrutinises the purchaser’s power usage/needs and prepares precise specifications before going to auction
  2. Commissions are the same regardless of supplier
  3. Auctions are booked in advance, so both suppliers and purchasers have time to be informed and prepared
  4. 10 minutes is allotted for each auction — however, if there is any attempt by suppliers to gazump the process, this time is extended
  5. AEX prepares a detailed report to purchasers covering the most attractive bids
  6. Bidders cannot see each other’s offers

AEX is generally only suitable for organisations with annual power bills in excess of $20,000 (electricity/natural gas).

Activ8 – estimated 60% of revenues

Activ8 service packages range from a basic option to a full monitoring and contract management system including detailed reports, alerts, specific recommendations, implementation and bill validation. In this division, average contract length is over four years and the number of client sites has grown to over 7,500. Activ8+ has over 60 clients — a tenfold increase on last year. Activ8+ is the top-notch offering.

In addition to the above Energy Action acquired Ward Consulting, a well regarded energy consultant to the property industry, in 2012. Reports are that Ward Consulting is performing well above expectations.

Now, to the figures 

Energy Action is a very straightforward business. Earnings per share (EPS) for the 2013 year are expected to come in around 18c, and the dividend 9c. Allowing for 15% growth in EPS and dividend for 2014 and 2015, a share price of $2.85 gives the following:  2014 – EPS 21c, price earnings 13.6, fully franked dividend yield 3.5%; 2015 – EPS 24c, price earnings 11.9, fully franked dividend yield 4.2%. Return on equity is expected to sit around 30% and the company has no debt.

Any resolution of the carbon debate will be positive for Energy Action as the ongoing uncertainty has shortened average contract length. With all states in agreement about a market pricing model for energy, there is no reason the energy management industry will not continue to grow. Further information on Energy Action including broker research is available on its website.

Foolish takeaway

As any Fool knows, sometimes the simplest business models are the most consistently rewarding. If the desire is there (rationalising and lowering energy costs) and both supplier and purchaser are brought together in an efficient, well managed and innovative way, mutually successful transactions are the likely result. Energy Action is a proven effective facilitator in getting both the supplier and purchaser to tango and has appeal as a solid small-cap investment.

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Motley Fool contributor Peter Andersen owns shares in Energy Action.

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