ERM Power ups its profits by 44%

ERM Power (ASX: EPW) is a $500 million company that operates as a specialist electricity retailer to big and small businesses as well as having interests in power generation and gas exploration businesses.

The company has reported a 34% increase in sales volumes, an electrifying 67% increase in revenue to $1.57 billion and growth in underlying net profit after tax (NPAT) excluding significant items of 44% to $20 million. The boost in profits has allowed the company to increase its full year dividend from 8.5 cents in 2012 to 10.5 cents in 2013.

ERM’s record level of sales volume has positioned the company as the fourth largest retailer in the National Electricity Market. The majority of this volume growth was achieved via the traditional large business market, however ERM has been progressively moving into the higher margin small business market which bodes well for the future profile of the company.

While retailing is still the company’s main game it continues to expanding its vertical integration through company-owned power stations which have continued to perform reliably and a gas processing facility which started producing gas during the 2013 financial year. An ASX announcement also shows that ERM recently took a 7% stake in oil exploration company Empire Oil & Gas (ASX: EGO).

Niche players in the electricity market such as ERM can well be worth investor attention. Australian Power & Gas (ASX: APK) recently received a takeover offer from AGL Energy (ASX: AGK) at a 33% premium. Energy Action (ASX: EAX) which runs an ‘electricity auction market’ to pair electricity and gas suppliers directly with customers, has seen its share price rally 56% in the past 12 months.

Foolish takeaway

Despite a capital raising earlier in the year, ERM’s balance sheet is not as robust as many investors would require. However with management providing guidance of underlying NPAT of between $21 million and $24 million in FY 2014 (this is after accounting for $7 million in developing new products, services and generation opportunities and excluding the Neerabup power station arbitration) and also forecasting growth of around 28% in electricity sales volume, this company could well deserve a place an investor’s watchlist.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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