Bargain Shares 2024: A net zero strategy that will soon be rewarded

eEnergy (EAAS) is a technology-enabled energy services provider that helps corporate and public organisations achieve their net zero goals by designing, funding and implementing energy efficient projects.

The group has grown quickly since listing on London’s junior market four years ago, buoyed by a combination of organic and acquisitive growth. This has not gone unnoticed. Following several unsolicited approaches, the directors recently announced the sale of its fast-growing energy management business to Flogas, a division of support services group DCC (DCC), for an initial cash consideration of £29.1mn (7.5p a share). Around £4mn of the proceeds will be used to pay off intra-company debt and a further £8.1mn will pay off eEnergy’s borrowings.

Joint house broker Canaccord Genuity estimates that the group held £1mn cash on 31 December 2023, so on completion of the disposal, which is subject to shareholder approval, pro-forma net cash of £18mn will back up two-thirds of eEnergy’s market capitalisation of £27.5mn. In addition, there is a valuable earn-out agreement that eEnergy’s directors believe could earn the group a further £8mn-£10mn of contingent cash consideration payable in two instalments later this year and in late 2025. The earn-out is capped at £20mn and is subject to the energy management division delivering an agreed minimum level of earnings.

The benefit for eEnergy’s shareholders is that the energy management disposal delivers a potential £39mn total return (including a £10mn earn-out) on the £23.4mn invested in that business since December 2020. The acquirer is paying a multiple of 6.5 to 8.5 times the energy management division’s forecast 2024 cash profit (of £4.6mn) to enterprise valuation.

Importantly, it means that eEnergy’s board now has the funding to accelerate growth in its other fast-growing business, energy services. This operation helps clients cut their energy consumption by switching to energy-efficient technologies by way of a capital-free funding model.

Turning energy efficiency into a service

Specifically, eEnergy delivers energy reduction solutions by offering clients energy-efficiency-as-a-service (EEaaS) through the deployment of LED technology, other energy efficiency solutions, charging infrastructure and rooftop solar photovoltaics (PVs). Its largest customer segments are in education and healthcare. Customer asset upgrades, paid for through lower energy bills, are financed through third-party finance partners that have long-term relationships with eEnergy.

For instance, energy-efficient LED upgrades to schools remove the barrier of a high upfront capital commitment. Instead, the client pays a service fee that is more than funded by the energy savings made. The initial service contract is for a term of five to seven years, after which the customer continues to access the energy savings without having to pay a fee. By replacing aging lightbulbs with LEDs, customers can reduce energy costs by 80 per cent compared with traditional lighting, a significant saving given that lighting can account for up to half of a school’s electricity bill. The typical school contract is worth £100,000, but it can be several times higher for organisations with multiple sites. In the UK, there are around 25,000 state schools and 2,000 independent schools, suggesting a total addressable market worth billions.

eEnergy’s in-house solar PV system solution offers an equally compelling offering for clients by providing them with onsite solar generation at no upfront investment, significant energy savings, and cheaper energy consumption than buying directly from the national grid.

A good example is the group’s £3mn contract with West Midlands-based Tudor Grange Academies Trust. eEnergy is providing Tudor with a fully funded 10-year service agreement with no upfront costs for a turnkey energy solution. It will enable its 12 schools to generate 30 per cent of their energy needs and earn additional income exporting any unused energy to the national grid. eEnergy will recognise £1.9mn of revenue for the contract in 2024 and 2025.

eSolar projects are a significant growth area, so it’s reassuring to know that the ability of eEnergy to deliver on new contracts is underpinned by off-balance-sheet arrangements with funding partners to finance the capital cost of the projects. It also improves the group’s own working capital position.

Energy-efficiency-as-a-service profits booming

The EEaaS offering is not only high-growth, but is profitable. Analysts at Canaccord Genuity estimate that the energy services division’s revenue increased 144 per cent from £9.6mn to £23.5mn from 2021 to 2023, and that annual cash profit more than trebled from £0.9mn to £2.6mn. The last figure is worth noting because it more than covers the group’s estimated central overheads of £1.9mn.

Moreover, with analysts predicting that the energy services division's revenue will increase by 25 per cent to £29.5mn in 2024 and by a further 10 per cent to £32.6mn in 2025, cash profit could surge to £4.5mn and £5.4mn, respectively. Central overheads are only expected to rise by £0.2mn in each year to support the rapid growth.

Sum-of-the-parts valuations

The point is that if you value the energy services business on a similar rating to the energy management disposal, then it could also be worth £30mn (7.8p) as a standalone entity assuming the board hits analysts’ earnings expectations. That sum is more than eEnergy’s own market capitalisation of £27.5mn. Add to that £18mn (4.6p) of pro-forma net cash and a potential £8mn-£10mn (2-2.5p) earn-out on the energy management disposal, and it’s not difficult to see why Canaccord has a target price of 12p and analysts at research firm Equity Development have a 13p-a-share fair valuation. My sum-of-the-parts valuations are even higher. Buy.