Buy Energy Assets for cheap growth

In the 12 months to 31 March, the gas metering services group organically increased turnover 34 per cent, while cash generated from operations climbed 58 per cent. That remarkable growth isn't a one-off, either; as the table below demonstrates, Energy Assets has been growing sales and profits at nearly the same pace for years - and, if broker forecasts prove accurate, the company will continue to grow strongly for some time to come.

That's because demand for the installation of Energy Assets' advanced and smart gas meters is being driven by a government policy that every metering point in the UK have a smart-enabled energy meter by 2020. Rising energy prices mean industrial gas users are also upgrading their meters to improve energy efficiency. Energy Assets is at the forefront of this change and is the largest independent provider of metering services to the UK industrial and commercial gas sector.

Its business model is simple. Energy Assets borrows money from its bank to cover the upfront cost of installing the smart gas meters, which cost around £850 each. The customer then pays Energy Assets a rental fee each year for the life of the meter - typically 20 years - at an average of £135 annually. The company installed around 20,000 meters last year to take its portfolio to 101,000; broker Numis expects a similar increase this year. Sometimes, Energy Assets also provides meter reading services at an extra cost. Other times, if the customer needs help with engineering design, infrastructure upgrades or compliance and accreditation, Energy Assets will provide these services, too. The cost of meters are fully capitalised on the balance upon installation, and fully amortised through the profit and loss statement over the first half of the asset life.

Renting the meter and collecting its data represent the majority of Energy Assets' business, providing it with a highly visible, reliable revenue stream; in fact, 70 per cent of total revenues are now recurring, up from 55 per cent in 2011. The consulting and engineering side is nevertheless growing fast - revenues and gross profit climbed 28 per cent last year - giving the bottom line a substantial boost.

Underlying EPS rose 73 per cent last year thanks to the operational gearing inherent in the business, with the company investing over £21m in the period mainly on meters. Clearly, if Energy Assets is to continue growing at such a fast rate, it must have sufficient financial firepower to keep investing in long-life metering assets. The company made sure it has enough for at least the next two years when it refinanced its debt and signed a new £35m facility with Bank of Scotland in November 2013; available financial resources totalled around £47m at the year-end. Admittedly, borrowings have risen sharply in recent years and now sit at £51m. But that’s still only around 3.4 times cash profits, which is an acceptable ratio given the debt is secured by a high-quality income stream; metering incumbent National Grid’s (NG.) ratio is 4.8.

In the near term, there's also potential for Energy Assets to expand into a multi-utility service provider. The company already provides some data monitoring services for water and electricity meters, but the £2.3m acquisition of electricity specialist BGlobal Metering in April should substantially boost its profile in that sector.

True, the company's inexorable focus on growth means that unlike most utility companies, Energy Assets does not currently pay a dividend. But this should change over time as the company's asset base matures and is transformed into a reliable cash machine.