- Revenue dips from £55.1mn to £53.8mn
- Annual adjusted pre-tax loss of £6mn
- Net cash of £1.2mn
- Forward PE ratio of 6.5 (2024-25) and 4.3 (2025-26)
Eneraqua Technologies (ETP:36p), a provider of heating, hot water heat pump systems and water efficiency solutions, plunged to a deep loss in the 2023-24 financial year, having reported a record adjusted pre-tax profit of £10.1mn 12 months earlier. The underperformance reflected a combination of materially lower levels of profitability – gross margin declined from 41.9 to 22.7 per cent – and a hefty rise in administration costs which added £5.1mn to the cost base.
The main challenge was experienced in the group’s domestic energy business which mainly services customers that are public bodies or funded, directly or indirectly, by public expenditure. The general level of inflation in the economy impacted clients' operations where the cost of key activities, such as cladding, increased by far more than the rate of general inflation. High inflation also impacted capital investment programmes where budgets are fixed at the outset of each financial year.
In response to these pressures, Eneraqua’s clients were forced to rein back on their programmes and direct resources on essential works. This led to project deferrals and significantly lower revenue than had been forecast 12 months ago. Moreover, given the nature of the cost base and the associated operational leverage of the business, the impact on profits was accentuated by the lower levels of utilisation and efficiencies.
To compound matters, the UK Government announced in August 2023 a review of its plans to achieve reductions in nitrate pollution, resulting in a hiatus in project work in Eneraqua’s water business. Specifically, the group’s patented Control Flow HL2024 technology lowers water wastage and improves end-user experience by reducing the fluctuations in flow rates that occur in systems. In public and private commercial buildings, it helps reduce water and carbon emissions, thus contributing to decarbonisation programmes.
The UK Government has since clarified its position and the directors believe the latest guidance will likely have a positive effect on the industry, albeit it caused a material delay in project work being carried out in the last financial year.
Contract wins
Although the domestic energy sector has not yet returned to normal, Eneraqua has continued to secure contracts, the largest of which is a £12.7mn award with the Royal Borough of Kensington & Chelsea for the replacement of an end-of-life gas fired heating system with a low-carbon heat-pump based system. Eneraqua’s turnkey retrofit communal heating systems help clients meet their sustainability and net zero goals as well as reducing energy costs.
Importantly, growth in the non-domestic sector has diversified the client base. For instance, Eneraqua has secured its first NHS contract, worth £11.3mn, with the Kingston NHS Trust and won a £7.2mn contract to fit a low-carbon heat pump system in a leading museum and art gallery.
In the water segment, the group landed its first nutrient neutrality contract with Ashford Borough Council in Kent to install its Control Flow HL2024 products in 5,000 existing homes. In addition, the small international business is seeing demand growing across a range of industries. In Spain, the Control Flow HL2024 system has been installed in four hospitals and several student accommodation and care home sites. The business has a healthy pipeline of new projects with interested parties across a variety of sectors, too.
Return to profit planned in new financial year
It’s reassuring that the directors expect the group to return to profitability in the new financial year.
Backed by a £101mn order book, analysts at joint house broker Liberum point out that £83.2mn of work has already been secured for the 12-month trading period, providing full coverage to their revenue estimate of £84.3mn and implying 56 per cent annual growth. Contracts include two energy projects in Scotland and Yorkshire that slipped from the 2024 financial year. Furthermore, there is scope for upside to forecasts. That’s because Eneraqua should be able to secure additional revenue from the next NHS funding rounds, albeit the allocations made to individual NHS Trusts may be delayed until October due to the general election.
Based on a five percentage point recovery in gross margin to 28 per cent and factoring in cost savings to right size the business, Liberum envisages the group making a cash profit margin of 6 per cent in the 12 months to 31 January 2025. On this basis, the £12mn market capitalisation group is forecast to deliver cash profit of £5mn, operating profit of £3.2mn, pre-tax profit of £2.5mn and earnings per share (EPS) of 5.5p.
Singer Capital Markets has similar forecasts and both broking firms expect EPS to recover to 8.3p (Liberum) and 8.5p (Singer) in the 2025-26 financial year. This implies the bombed out shares are trading on prospective price/earning (PE) ratios of 6.5 and 4.3, respectively. They are priced 37 per cent below book value, too.
Scope for material share price recovery
Of course, shareholders will need to see firm evidence of a recovery unfolding before regaining their poise, having seen the shares plunge in value since the last annual results. Also, there will be a second half weighting to profits and analysts’ estimates are adjusted for £0.4mn of exceptional charges for the cost savings programme. In the 2023-24 accounts, Eneraqua booked £1.6mn one-off costs (mainly redundancy costs).
Having said all that, with earnings set to rebound, the outlook improving and offering material upside to analysts’ target prices of 67p (Singer) and 80p (Liberum), the shares have recovery potential. Buy.
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