Energy Action (EAX: ASX) has had a very chequered past in recent times. Following a successful IPO and relatively successful early days post IPO the performance under the tenure of the previous CEO Scott Woodridge was a torrid affair from a shareholders point of view. The share price fell from circa $4.00 at the time of his appointment to around $0.80c by the time he resigned in early 2017. New CEO Ivan Slavich seems to be turning things around and has got some early runs on the board.
EAX operates 3 main divisions, which I will outline briefly;
Energy Procurement Division
EAX’s energy procurement division provides a range of products and services for commercial and industrials users. Options include structured products, RFP’s & Tenders, Tariff negotiations (more for SME’s) and their own propriety online reverse auction platform, AEX. This division represented 33% of EAX’s revenue in 1H18 and saw strong growth with revenue up 38% on the pcp. Pleasingly, the AEX reverse action business saw increases in the number of auctions, auction prices achieved and contract durations. These are all positives for EAX as they “clip the ticket” on each auction completed over the life of the contract. Hopefully, this is not a one-half wonder and this division can continue to be a solid contributor to the group moving forward.
Contract Management & Environmental Reporting Division
EAX’s contract management and environmental reporting division provide services such as bill and tariff checking, site energy utilisation metrics, environmental reporting and compliance and other BI related energy metrics. EAX provides these services by utilising both its own in-house software (Energy Metrics Solution) and resells third-party software (Bureau Services Solution) to customers. This division is EAX's problem child. Sites under management are continually falling in this division and consequently revenue. The division saw revenue down 10% in the first half. This division accounted for 48% of EAX’s 1H18 revenue. However, despite this, a positive from the negative is that the sites under management are falling precipitously in the low margin Bureau Services Solutions. However, the higher margin Energy Metrics Solutions while also losing sites, lost them at a much slower clip. Management is working on their Energy Metrics Solution software (read spending money on capitalised software) to improve the functionality and appeal to customers. It must be noted though at this point, that it’s hard to grow NPAT/EPS when a big division (even if not EAX's most profitable division) is going backwards.
This division provides consultation on solar for business, cogeneration, microgrids and management of embedded networks. The corporate division which represented 19% of EAX’s 1H18 revenue showed revenue growth at 8% over the pcp. EAX announced recently it had been awarded a $1.2m solar contract which is going to be delivered over the next 3 to 4 months. This bodes well for this division given this division recorded revenue of $3.2m in 1H18. Some of the revenue from this contract will fall into the 2H18 and some into 1H19 but it’s still a nice contract to have secured.
So overall we have 2 out of the 3 divisions not looking too bad to paraphrase music legend Meat Loaf.
The new management has laid out a clear strategy on how they plan to put the business back on its feet. Management is trying to engage with the market to build up the knowledge base again and educate the market on the turnaround strategy. However, given its long hiatus in the “too hard basket” and “serial underperformer” categories, establishing credibility with the market is going to take time. This is a direct consequence of the shareholder value that was destroyed under the previous CEO. I will, however, commend EAX for having a defined investor relations strategy as far too many microcaps don’t.
EAX have said they are focusing on cutting debt which fell $1.3m in 1H18. This will start to flow through into reduced financing costs in time which is a positive for NPAT and EPS. Hopefully, EAX will get back to a zero debt position as was the case in the early days of its listed life. The business has always been very cash generative with 88% of EBITDA converting to cash in the 1H18 which is another positive in terms of paying down debt quickly.
All vendor payments/earnouts from previous acquisitions along with previous impairments and restructuring costs seem to have flowed through the accounts. In fact, the 1H18 result was the first time in while that EAX had none of the aforementioned items in the cash flow or the P&L respectively. We finally got a clean set of numbers from EAX.
EAX did not declare a dividend at the most recent result in order to focus on getting their debt down. A sensible decision in my view in terms of the overall turnaround strategy. It must be remembered though that EAX has a substantial $6m+ franking balance. So, if and when dividends are restarted shareholders can expect fully franked dividends. I have EAX on P/E of around 10 times for FY18.
Overall, EAX had a solid first half and seems to be moving in the right direction. EAX is a stock in the nascent stages of a turnaround which is appealing but it still has a few risks around it and needs to rebuild its reputation with the market. It is on my watchlist most defiantly for the full year result in August. At this stage, it’s at least interesting.