UWT specialises in energy procurement and management services for businesses by negotiating rates with energy suppliers to reduce customers energy consumption. Listing on AIM in 2012, at 0.60p a share UTW had a market cap of just under 37mn.
UWT specialises in energy procurement and management services for businesses by negotiating rates with energy suppliers to reduce customers energy consumption. Listing on AIM in 2012, at 0.60p a share UTW had a market cap of just under 37mn. Revenues has grown from just over 1mn to just under 50mn in less than five years. Fuelling growth is an expanding team of energy consultants which has more than trebled over the past three years. UTW will add staff in FY15 to drive further growth in contracted revenue. The pace of growth since IPO has attracted institutional investors with the likes of the MFM Slater Growth Fund, River and Mercantile, Hargreaves Hale, Invesco, Investec, Old Mutual, JP Morgan, Legal & General, River & Mercantile, Lazard and Allianz all holding between 1 and 10% of the shares. The largest holder who recently added more shares is Neil Woodford via his CF Woodford Equity Fund who holds a 15.08% stake.
MANAGEMENT
Utilitywise was founded by Geoffrey Thompson and his son Adam in 2006. Geoffrey previously held senior posts in consultancy and outsourcing. The Thompsons are backed by Andrew Robinson, who worked closely with Geoffrey at outsourcing group Spark Response. As soon as the share price reached 0.75p in October 2012, all three leading directors sold over 8mn pounds worth of shares. In June 2013 the price had risen to 1.00 and the same directors sold over 15mn worth of shares. The Directors, mainly the Thompsons and Richardson have sold 52mn pounds worth of shares since the UTW IPO in 2012.
UK ENERGY & TPI MARKETS
Energy prices have consistently risen in recent years leading to higher bills for business consumers Ofgem estimates that there are 24 non-domestic electricity suppliers and 30 non-domestic gas suppliers, the market is dominated by the big six utility suppliers (British Gas, E.ON, EDF Energy, RWE, Scottish Power and SSE). The industry is under significant political and regulatory scrutiny and energy prices, in the short to medium term look likely to keep increasing. The energy markets have paid over 100mn in fines over the past four years for mis-selling contracts.
A recent research note by Edison Research for UTW suggested that defining the market opportunity available to UTW and other TPIs was difficult as data is scarce. Therefore UTW has defined its market opportunity by using a standardised list of companies based on Experian company data. The Edison note also mentions, what is in their view Ofgem estimate the market to be valued at a conservative 200mn in terms of fee opportunities this year (2014). However, a widely available report by energy consultancy Cornwall Energy, called Third Party Intermediaries in the Business and Industrial Energy Supply Markets gives a valid indicator to the scale of opportunity in the TPI market. The report clearly highlights the opportunity in UTWs two key market segments of Enterprise, serving mainly SMEs and Corporate aimed at blue chip companies.
The survey suggests that the enterprise segment has a value of 62mn saying that "TPIs are doing more and more business in this sector and are displacing previous direct customer to supplier activity. The TPIs collective share of SME energy contracts increased by 31% between 2013 and 2014. This market is increasing and expected to grow in coming years.
The Corporate segment is highly competitive "competition for I&C customers amongst TPIs is so great that it is becoming common for some end users to commission more than one TPI. TPIs also have to respond to increasing competition from some larger energy suppliers, which are now offering energy management and accountancy services that rival TPI’s. Revenues from negotiating I&C electricity contracts in 2014 are estimated to have risen 5% year-on-year to 118mn, with those from gas near unchanged at 52mn."
Ofgem estimates that there are around 1000 TPIs, from sole traders to European listed companies operating in this space. This level of competition poses a real threat to UTWs mid-forty percent margins. The number of competitors clearly demonstrates that there are few barriers to entry. The limited size of the potential market in the UK is probably why UTW need to diversify in new territories in order to sustain growth.
Theoretically there is little to stop energy companies, with significant capital and resources from seizing this market. However E.On were recently hit with a record 12mn fine for mis-selling domestic contracts stating that they have now ceased all direct sales techniques. E.On was also the last company to stop using door step selling techniques in 2012 and also says that it no longer uses direct telephone sales.
REGULATION
Ofgem has for some time been investigating if a single code of practice (CoP) for TPIs should be established and what its scope should be. The regulator's proposals for TPIs were published in February 2014 and proposed the introduction of a CoP underpinned by a licence condition on suppliers to be governed by an independent board comprising industry representatives and consumer groups. Ofgem said in August that it intends to take forward this approach for implementation by autumn/winter 2015.
Unless TPIs are able to demonstrate they have carried out a comprehensive market comparison and presented a range of offers to customers, any commission paid to them by suppliers should be revealed, the firm says. It also believes direct regulation of the sector with stringent penalties for bad behaviour is vital to protect customers.
Under Ofgems current proposals, customers will be able to ask for a breakdown of fees and charges involved, but that would only be on request rather than being automatically provided. Both Ofgem and various other consumer organisations have identified recurring complaints from TPI customers including instances of mis-selling, lack of contractual transparency and poor behaviour. These issues are a common cause for complaint, often repeated from numerous sources. The bizenergysaving specifically highlights UTWs business practices with commentary from ex and current staff, customers and other TPIs. On issues of UTW mis-selling it states:
We have seen clear evidence that they are commonly contracting small businesses onto electricity tariffs in the region of 15p/kWh to 20p/kWh and we have seen gas tariffs over 5p/kWh. These are extortionate prices for small businesses to bear; in fact you would be better off on a domestic tariff.
To add context to the details above the average price paid for non domestic electricity tariff in the UK is 11p/kWh in 2013. bizenergysaving further explains that it has seen copies of UTW customer contracts and highlights that the majority of contracts reside with three of the main big six energy suppliers.
We cannot reveal our sources but the article is based on specific examples of signed Utilitywise contracts that we have seen ourselves and direct one-to-one conversations with industry professionals.
The article also reveals the series of customer reviews on the review centre website showing a stream of positive reviews contradicting the fewer negative reviews, where log-in names tend to have been created same day or are guests. Several comments suggest that UTW staff have been paid a fee to write complimentary reviews where negative reviews are appearing. Comments from current and ex-UTW staff give a highly detailed and negative insight into business practices and company culture, here is an example:
80% of the time we are told to push the deal that makes us the most money and not the deal that we should be pushing, namely the one that saves the client money.There are 2 or 3 main suppliers who (household name energy companies) that are quite happy in providing pricing that is in some cases uplifted by 2 to 3 pence per kWh, a competitive uplift would be in the region of 0.2 of a pence per kWh.
This evidence, if true could suggests that any regulatory framework will have a significant impact on UTWs business.
VALUATION
The balance sheet is where the story begins to unravel. UTW have consistently shown growing amounts of accrued revenue since their IPO. UTW do make this practice clear, however UTW are still anticipating future revenue and profit. This presents a number of risks including the possible lack cash flow and potential contracts not becoming live as anticipated. If UTW had not included accrued revenue, FY14 revenues would have been 35.5mn instead of 48mn and FY13 revenues would have been 18mn pounds instead of 25mn. Lower revenues would obviously have had a significant impact on the stated profits and EPS. Accrued revenue and accounts receivable day’s sales outstanding have grown to a considerable level over the past three years (from 77 to over 200 days) as the company attempts to drive growth. Cash at the end of the year stood at 15.8mn, so why did they borrow 1mn pounds? The balance sheet at FY14 shows loans increasing from 5mn in FY13 to 6mn in FY14.
Based on the FY14 the PE is a reasonable 19. Broker forecast suggests FY15 EPS will continue to grow to 18.4p, so if achieved that would bring down the PER to 14. UTWs only listed competitor is Inspired Energy (INSE: LON), a TPI minnow, but still growing revenue at 41% per year. INSE currently has a PE of 31.4 illustrating UTWs value when comparing a direct competitior. The valuation of UTW depends on if it can sustain the rate of growth which over the past six years has seen 3000% CAGR. Broker FinnCap expects adjusted pre-tax profit of 18mn for 2015, giving adjusted earnings per share of 18.4p for 2015 (from 13.4p in 2014), rising to 25.7p in 2016. Let’s remember that UTW has already accrued 28mn in FY14 which will be realised in FY15. Therefore UTW with an increased staff could drive growth and meet the EPS target. However, I have developed a series of DCF models based on the average CAGR of 76% per year over the past three years.
|
High |
Base |
Bottom |
EPS |
13.4 |
13.4 |
13.4 |
Growth rate for next 3 years |
76% |
38% |
19% |
Terminal Growth Rate for 10 years |
5% |
5% |
5% |
Discount Rate |
12% |
12% |
12% |
Fair Value |
477.05 |
240.72 |
160.09 |
Upside/Downside |
49% |
0.40% |
-34% |
UTW is a rapid growth story exploiting a fragmented and crowded marketplace. The growth potentially remains cheap if they can gain market share in the UK and successfully execute the growth opportunities in Europe. Later this year UTW could be facing serious regulatory headwinds which could significantly restrict TPIs conduct and impact revenues. The TPI business model lacks barriers to entry and is susceptible to the changing dynamics of the energy companies. UTW currently faces strong competitive pressure, where margins could well come under pressure in a crowded marketplace. These risks are compounded by the accrued income treatment which could become a problem if growth stalls or if the contracts don't go live are deemed invalid due to a changing regulatory framework. Serious questions must also be raised about the huge Director/s selling from IPO until 2014. Overall the risks outweigh the benefits with the shares currently fairly valued at 2.40 based on my base DCF model. The question remains why have so many institutional investors fallen in love with UTW?
Disclosure: No position in UTW