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Results: Why the Energy Action Ltd (ASX:EAX) share price roared higher today

The Energy Action Ltd (ASX: EAX) share price ripped 25% higher to $0.84c this morning, following publication of its full year results. Company revenues fell 5% to $31.1 million, while net profit after tax (NPAT) jumped 46% to $2.6 million.

“Operating” profit after tax – underlying profit by any other name – rose 3% to $2.6 million.

Energy Action reported 9.7 cents in underlying earnings per share and declared 4 cents per share in full year dividends. The company ended the year with $1.1 million in cash and $5 million in debt, for a net debt position of approximately $3.9 million.

Revenues grew 5% due to strong growth in the Procurement business (+15%), offset by lower volumes in Contract Management & Environmental Reporting (CMER) (-9%) and Projects and Advisory Services (-15%). In recent years Energy Action has decided to focus more on high margin consulting work.

This should improve the company’s profitability in time if it can add enough high-margin revenue to offset the decline in lower margin businesses. Energy Action also generates substantial cash flow and paid down just over half its debt during the year.

Management provided an outlook and list of priorities for 2019, including adding new products and value-add services, including facilitating corporate purchasing agreements between developers and clients, and extending several products to smaller clients.

The company also flagged the possibility of a merger, sale, or joint venture of parts of the business, with “significant interest” being recorded by PriceWaterhouseCoopers, which was hired to conduct a strategic review of the Energy Action business.

As a business/consultant that helps other businesses understand and reduce their electricity usage (reducing costs) there is likely to be substantial demand for Energy Action’s services over the next few years.

A merger would potentially make sense as currently the company is quite small, although it is winning work from big-name clients. Despite the 15% rise in the share price today, Energy Action looks cheap to me, trading on around 10x earnings, at the same time as the business is improving. It is worthy of closer investigation.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Energy Action Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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