Energy Action trading close to fair value (ASX:EAX)

The share price of Energy Action has been trading above $3 for some time now, having reached as high as $3.50. The company is growing revenue streams, and in a recent update, informed shareholders that it has appointed Fort Street Advisers to help “assess growth opportunities in the market.” They have also appointed an executive search firm to help find a replacement for Managing Director Valerie Duncan, who has signaled her intent to retire at some point in 2014. Evergreen Capital Partners and Perennial Investment Partners hold approximately 9% and 6% of the company respectively. Citigroup Global Markets also holds a relevant interest in about 5% of the company, subject to an obligation to return the borrowed stock to the lender. I don’t dare speculate as to what this means, however, what is certain is that Energy Action is no longer under the radar.

I believe that EAX is a well-run company, with dependable, diverse revenue streams, in a market that is likely to grow. Of particular note is that it has teamed up with First Solar to install solar panels for a major client. It’s great to see Energy Action partner with another well-run company.

On the other hand, I also think the company is fully priced by the market at current prices of about $3.10. Indeed, using a discounted cash flow model (which may not be the superior way of valuing this stock), and assuming strong growth, I value the stock at no more than $3.25 (That’s a market capitalization of about $83 million). As a shareholder of August Investments, I supported the Managing Director’s decision to sell part of the holding of EAX at above $3, simply because it no longer presents the same compelling value as it did in the past.

In conclusion, the annual report will tell us a lot about Energy Action’s prospects. Of some concern to me is that management have essentially outsourced part of their job to Fort Street Advisers and an executive search firm. Current management have demonstrated great skill in growing the company, organically and by acquisition; they will be a tough act to follow. The bottom line (of this research) is that if the number of customers using the AEX continues to grow, Energy Action has a bright future, because this will allow it to cross-sell its more profitable services… er…efficiently.

Diluted EPS

Dilution is occurring as a result of acquisitions

 

 At the time of writing, the author does not have a direct interest in Energy Action. The author has an indirect interest in shares of EAX, through August Investments.

 

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