This tech-cum-energy stock is an absolute bargain

Annual results from technology-enabled energy services provider eEnergy (EAAS: 5.9p) had been flagged in early March when the directors announced a £40mn project funding facility with NatWest alongside a pre-close trading update.

The numbers for the 18 months to 31 December 2023 are complicated by the inclusion of the energy management business that was sold for £29.3mn after the period end. However, the bottom line is that the retained energy services business delivered £2.3mn cash profit (pre-central overheads), or £1.5mn on an annualised basis. Following the disposal, management is taking steps to right-size the cost base, which will see annual central costs reduced from £2.3mn to £1.6mn by the final quarter of 2024.

The company helps organisations achieve their net zero goals by designing, funding and implementing energy-efficient projects (solar, electric vehicle charging and energy-efficient lighting). The new facility provides eEnergy with off-balance-sheet funding for public sector customers, lowers its cost of capital, delivers an attractive return on the retained project interests and improves the group’s competitive position when tendering for multi-site contracts.

2024 results second-half weighted

True, the combination of balance sheet constraints prior to the disposal and delays in conversion of the sales pipeline due to the increased cost of funding in the market means that profits will be weighted to the second half of this year. 

However, the directors highlight signs of market recovery, and recently announced a £5.2mn contract (for delivery in 2024) with Spire Healthcare Group to provide solar systems across 38 sites. The contract accounts for 20 per cent of Equity Development’s revenue forecast of £25.5mn for 2024. On an annualised basis, the energy services division delivered £17.5mn in the 2023 financial year, up from £10.5mn in 2022; it is a fast-growing business activity and one that doubled its order book last year.

Importantly, eEnergy now has the financial firepower to take on large multi-million pound contracts, which will accelerate both sales and profit growth. Indeed, analysts expect cash profit (pre-central overheads) to rise to £2.7mn (2024) and £4.7mn (2025) based on revenue of £25.5mn and £31.5mn, respectively. So, with central costs set to be reduced to £1.9mn (2024) and £1.6mn (2025), group cash profit could quadruple from £0.8mn to £3.2mn next year. At the same time, Equity Development expects net cash to be maintained around £9mn (2.5p) over the two-year forecast period.

Moreover, contingent deferred consideration (payable in two instalments) could add £8mn to £10mn (capped at £20mn) to the cash pile within 18 months. Effectively, it means the operational business is in the price for £1.7mn as a standalone entity, or less than one times 2024 cash profit estimates (pre-central overheads). To put the bargain-basement rating into perspective, the energy management division was sold on a multiple of 6.5 to 8.5 times forecast 2024 cash profit to enterprise valuation.

So, although the share price has drifted since I suggested buying the shares at 7.15p in my 2024 Bargain Shares Portfolio, the strong asset backing and growth profile of the business underpin more than 100 per cent share price upside to sum-of the-parts valuations. Buy.

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