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eaga a go go

SHARE TIP: eaga (EAGA)
September 26, 2011

BULL POINTS:

■ The government's Green Deal

■ The extension of CERT

■ Opportunities for diversification

■ Undemanding PE ratio

BEAR POINTS:

■ Dependant on government policy

■ Competition in new fields

The only colour we hear about these days is green. Even if we are green, we're not green enough. And if we don't go green, we're told future generations will be blue. But what we're rarely told is how to make money from the carbon-friendly agenda.

We reckon we've found an answer. The UK government recently announced its intention to push though measures called: "The Green Deal," and outsourcer eaga looks in the prime position to benefit.

IC TIP RATING
Tip styleGrowth
Risk ratingMedium
TimescaleLong term
What do these mean? Find out in our

First, let's explain the scheme. The aim of the Green Deal is to ensure that everyone cuts down on both CO2 emissions and energy costs by insulating their homes, and using new boilers and so-called smart meters. Energy suppliers will be encouraged, through incentives and a "green investment bank", to foot the bill for upfront costs, while priority will be given to the 4.6m "fuel poor" households in the UK. Most importantly, the Department for Environment and Climate Change says: "The Green Deal may choose to form partnerships with local authorities and registered social landlords to offer locally-based solutions."

Why is this fantastic news for eaga? The outsourcer currently derives 45 per cent of its revenues from administering and installing measures for "Warm Front" contracts, a previous government initiative to upgrade boilers. This means the group already has established contacts with housing associations and local authorities, so is well-placed to help drive the Green Deal. What's more, National Audit Office records say the group has an excellent track record of delivery, partly due to the sheer breadth of its coverage - eaga has 1,100 engineers working from 30 depots nationwide.

Furthermore, in terms of dealing directly with gas and electricity suppliers to upgrade homes, eaga holds a second ace. That's because the government is also committed to extending its Carbon Emissions Reduction Target (CERT) to the end of 2012, and has said it will introduce a new obligation on energy companies after that date. According to broker KBC Peel Hunt, CERT has already created a £1bn annual market of non-discretionary spending by utilities. And luckily, eaga is the only company with framework agreements in place to help six major power suppliers meet their power-saving obligations.

ORD PRICE:109pMARKET VALUE:£274m
TOUCH:108-109p12-MONTH HIGH:160pLOW: 102p
DIVIDEND YIELD:3.9%PE RATIO:7
NET ASSET VALUE:54pNET CASH:£34.6m

Year to 31 MayTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2007483-87.4-34.3nil
200863928.47.23.0
200973937.710.73.5
2010*76741.214.53.9
2011*82047.715.34.2
% change+7+16+6+8

Normal market size: 3,000

Matched bargain trading

Beta: 0.7

*Execution Noble estimates

The group is also trying to tap into the solar market by installing panels on social housing estates in return for government tariffs. The landlord gets to reduce its carbon emissions, the tenants benefit from lower bills, and eaga receives a steady income from the tariffs. So it's win, win.

Granted, these three positive "green" developments are politically sensitive and could seemingly change at the whim of energy secretary Chris Huhne. Cancellations or delays to these schemes would certainly affect the outsourcer's growth figures.

But thankfully, eaga is also looking to diversify. The group purchased over 100,000 boilers last year for social housing, so certainly has the buying power to compete in the repairs and maintenance market, both for higher income households and local authorities. One of the biggest players in social housing, Connaught, is in disarray, thereby opening a door. And while the present major providers to the 'able-to-pay' bracket, HomeServe and Centrica's British Gas, are trading well, eaga could try to compete on price.