LON : UTW
Utilitywise
St Andrews Investment Society November 14, 2016
Utilitywise plc
LON : UTW A proven record of growth, expertise and focused investment in innovative utility technology enable Utilitywise to propel itself in the long- Price (14/11/16) £1.66 term. Market Cap £130.5M EV
£108.0M
Company Overview Utilitywise was established in 2006 to assist the SME market in procuring their gas and electricity. Headquartered in North Tyneside, Utilitywise now employs over 1200 people. They specialize in energy procurement and energy management services for businesses. The company essentially negotiates rates with energy suppliers on behalf of business customers, provides an account care service, and offers a range of products and services designed to assist customers in managing their energy consumption. Customers are based throughout the UK, the Republic of Ireland and certain European markets, across a variety of industry sectors and the public sector, and range in size from small single-site customers to large multi-site customers. They have opened offices across the UK and have their continental headquarters in the Czech Republic. In June 2012, they successfully listed on the Alternative Investment Market (AIM) of the London Stock Exchange.
Investment Rationale PROVEN GROWTH
Energy, Utilities, and Materials Price Target Investment Horizon
£2.40 48m
24m performance: 400 300 200 100 0
Market Data: 52- Week Range Shares Out. (mn) EV/EBITDA EV/OpFCF P/E Div./Yield
1.12-1.98 78.11 5.9x 6.3x 7.95x £0.065/3.9%
Financial Data: Revenue (mn) Revenue growth EBITDA (mn) EBITDA growth EBITDA margin
84.428 22.2% 18.268 2.7% 21.6%
Leverage: Net Debt (mn) Net Debt/EBITDA EBITDA/Interest
£0.2 0.01x 32.08x
A strong track record since its inception in acquiring large, medium and small-scale clients enable Utilitywise to be exposed to many potential avenues of revenue growth in the long-term. This growth is highlighted through the 27% growth in client base. The performance in both its sectors has been solid in the last few years. Revenue in its corporate division (large clients) has grown 7% from 2015, while in its Enterprise division (SME), this is up 26%, with an increase in EBITDA of 20%. We also expect growth catalysts to come through the deregulation of England’s water supply and its investment in technology. The firm has also made clear its desire to expand into Europe, with the number of clients in Continental Europe increasing by over 18% Yo-Y.
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LON : UTW
Utilitywise
FAVORABLE SECTOR CONDITIONS Although it is a newly established firm, its market position is favourable due to there being no direct competitors. Demand for Utility Consulting is growing and the market is unsaturated with many opportunities to grow and expand their client base within the UK. Europe also provides a ripe and fertile ground for the firm to set down its foot and continue its expansion. The continuing desire for deregulation and rising utility costs, from power prices to heating for businesses is making Utility consulting a more appealing concept for businesses to look into. LONG TERM STABILITY AND MINIMAL FORTHCOMING RISKS The company’s stable position and low risks make this a small-cap stock with a smooth risk profile that boosts investor trust. Macro risks are very low due to the firm’s business model. Since the firm specialises in cost management solutions for its clients, any recession or downturn in its clients’ businesses are unlikely to cut such a mutually beneficial tie. Its diversification in small, medium and large-scale businesses also mean that any sector turbulences would not impact the firm. Furthermore, Brexit would have a neutral or positive long-term effect on the firm as the unshackling of EU regulations would enable the UK to further deregulate its Energy and Fuel environment. This has been hinted at by the government as one of its desires for leaving the EU, providing Utilitywise with further areas in which to expand its services. TACTICAL ACQUISITIONS AND INVESTMENT IN CLOUD TECHNOLOGIES Utilitywise has been investing in its own apps and software for Utility management, as well as in new technology acquisitions. Utilitywise recently purchased t-mac Technologies, which allows it to offer customers energy management systems for buildings. The acquisition of t-mac technologies has added market leading cloud based energy monitoring systems and controls capabilities to the firm’s service portfolio. The partnership with Dell to introduce Internet of Things (IoT) Building Automation and utility optimisation solutions to customers is progressing well, with trials now being conducted. This new technology is expected to be rolled out within the next year. This will incentivise current and new clients and should generate further revenues.
Business Model Utilitywise are one of the UK’s leading energy and water cost management consultancies. Utilitywise advises SMEs (small and medium enterprises) and multinationals in procuring gas and electricity. The firm also helps businesses get the most value from their energy and water contracts, reduce their energy and water consumption and also help to lower their carbon footprint. The company’s approach is to bring more control to the overall price by focusing in on the wholesale energy price through a flexible contract and a risk managed approach. This brings greater control and effective cost management to procuring energy. They have a diverse client portfolio ranging from small local businesses to multinationals with many sites across the country. They manage over 67,000 energy meters for public and private organisations across the UK, Ireland, France and Germany. Utilitywise has partnered with Dell and was named an OEM (original equipment manufacturer) by them as part of a joint strategy to introduce Internet of Things (IoT) Building Automation solutions to customers. They plan to roll out these technologies in 2017 and 2018 to current and new clients. They also aid customers by providing consumption management solutions, and in particular, exploit cloud-based energy monitoring and IoT technologies to do so. They employ energy consultants (including ‘field based’ consultants) and offer various energy management products and services designed to assist in identifying ways to reduce the customer's overall energy consumption. The company operates a 'partner channel' where organisations refer customers to Utilitywise; commissions generated from these customers are shared between Utilitywise and the referring organisation. Further services that Utilitywise offers its customers are guidance to companies looking to follow Climate Change Agreements, staff
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LON : UTW
Utilitywise
awareness training, and energy performance certificates that all buildings built, sold, or rented after 2008 require. The firm runs two primary divisions with respect to utility consulting. Corporate Division: Deal with large businesses serviced by energy consultants, field sales, the partner channel and inbound. Enterprise Division: Partial overlap with the upper mid-market businesses belonging to the Corporate Division, serviced by energy consultants, the partner channel, E-commerce and inbound. Over 31,000 clients.
The Utilitywise business model is to offer a complete energy-services platform to a total potential market of 2.45m businesses. The key priorities of the firm include reaching out to new clients and developing their ability to offer their expertise across a wide and diverse range of business clients.
Market Position Utilitywise has expanded dramatically from its inception in 2006. Originally established as a 3-person company to target the SME (small-medium enterprise market). It became apparent that the SME market was very receptive to assistance and it has continued to expand its ability to service this market with increases in personnel and capabilities. Today Utilitywise has over 1,200 employees and is continuing to develop through acquisitions and investments. Utilitywise has grown and tried to maintain its position in the market by purchasing similar organizations like Aqua Veritas Consulting Ltd, EIC Ltd, and Prague-based ICON Communication Centres. The partnership with Dell to introduce Internet of Things (IoT) Building Automation and utility optimisation solutions to customers is progressing well. This new technology is expected to be rolled out in the next year. Utilitywise also recently purchased t-mac Technologies, which allows it to offer customers building energy management systems. The acquisition of t-mac technologies has added market leading cloud based energy monitoring and controls capabilities to the firm’s service portfolio. These two deals highlight their desire to lead the utility technology space. Whilst there are similar products and competitors on the technology front offered by Capterra and Eportal, Utilitywise has the advantage of having a large client-base, enabling them to build their products with the knowledge of their clients’ needs coupled with the ability to reach and implement solutions for them with far greater ease. They have also focused a great deal on expanding into Continental Europe. Having recently opened offices in Prague, they currently serve over 6,000 clients in this geography and management have expressed a desire to invest further into expanding its operations in this location.
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LON : UTW
Utilitywise
Utilitywise faces competition from Smith Bellerby, a cost management consultancy that services companies in the UK, ECM, a water and energy management consultancy that advises companies in the UK, and Evolve, a utility cost management consultancy that was established in 2003, has over 1500 clients, and also services companies in the UK. Utilitywise sets itself apart from these competitors by offering technology and cloud-based management solutions and having a specialised team of energy consultants and a well-established client-base.
Financial Position From their most recent financial results, we see Utilitywise maintaining a very strong financial position. Revenue grew from £69m to £84.4m between 2015 and 2016, an increase of 22%. In comparison, revenue growth from 2014 to 2015 was 41%. From 2015 to 2016, the gross margin was 38.84%, net profit margin was 18.74%, and operating margin was 21.47%. EBIDTA grew by 2.7%, from £17.8m, to £18.3m. In addition to this, the dividend for fiscal year 2016 was 6.5p, an increase of 30% from 2014. This corresponds to a dividend yield of 4.1% and a payout ratio of 32.03%. Both dividends per share and earnings per share, excluding extraordinary items, grew 30.00% and 38.25% respectively. The net debt of the company dropped from £6.7m to £0.2m from 2015 to 2016, which allows Utilitywise to invest further in new regions as interest costs fall. Further, during FY2016, Utilitywise experienced an increase in customers in the UK&I of 23% and a 49% increase in international customers. Utilitywise’s ROA and ROE in 2016 was 16.50% and 29.99% respectively. The return of investment for the same year was 21.11%. The fact that Utilitywise paid back a large amount of their outstanding debt meanwhile significantly increasing dividends add to our belief that the company is well positioned financially to take advantage of future growth opportunities.
Utilitywise - Financial Summary FY2013A
FY2014A
FY2015A
LTM
13A-15A CAGR
25.256
48.95
69.106
84.428
65.4%
-
93.8%
41.1%
22.2%
EBITDA
7.817
14.161
17.785
18.268
Margin
30.1%
28.9%
25.7%
21.6%
7.411
13.059
16.662
17.769
Margin
29.3%
26.7%
24.1%
21.0%
OpFCF
6.257
11.740
12.407
17.208
Margin
24.8%
24.0%
18.0%
20.4%
4.578
9.266
11.196
15.820
18.1%
18.9%
16.2%
18.7%
($m, FYE Dec) Revenue Growth
EBIT
Net income Margin
50.8% 49.9% 65.8% 85.9%
Growth Prospects The company’s revenue has been growing at over 20% annually since its founding. From four employees in 2006, Utilitywise now employ over 1,500 experts in electricity, gas and water procurement, monitoring and management. They have benefited greatly from operating in an unsaturated market with few competitors and peers. Their growth strategy is structured on the following key priorities.
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LON : UTW
Utilitywise
Retaining existing customers through extensive communication and feedback. Building market share by reaching out to new clients. One strategy being used here is a ‘partner channel’. It incentivises its clients to refer new customers by offering them a commission that is shared with them. Utilitywise also prioritises investing in people by training staff and running workshops and educational programs and innovating by investing in new software, apps and acquiring products that could be of use to their client’s utility management and optimisation.
The company wishes to continue expanding in the long-term in continental Europe. The company has also recently opened offices in Prague and currently serves over 6,000 clients in Europe. Its long term goal is to extend its operations in Europe, which is thus far a vastly untapped market. They are currently procuring energy on behalf of customers in four European countries: France, Germany, Holland and Belgium, and plan to grow business in Europe through acquisitions such as ICON Communication Centres, Prague. Utilitywise is also devoted to maintaining its organic growth in the UK with SME and large-scale businesses that it has shown it can maintain. Their results continue to be strong with revenue growing by 22% Y-o-Y and at over 20% since inception. A lack of peers and competitors ensures that the barriers for growth remain low. Utilitywise is also hoping to capitalize on England’s de-regulation of the water market in 2017. It hopes it can bring in new customers and deepen its relationships with existing clients by advising on water. Their strong customer base and new technologies is expected to continue this strong momentum of growth. The company also wishes to grow as a business through technology acquisitions to bring more capabilities and expertise on the technology front. Utilitywise has been investing in its own apps and software for Utility management as well as in acquiring new technology. Utilitywise recently purchased t-mac Technologies, which allows it to offer customers energy management systems for buildings. This acquisition has added a market leading cloud based energy monitoring system which allows firms to manage their utility usage with greater flexibility. While these investments lead to narrower margins, once the products can be refined, they will require less investment and are expected to pay off in the long run. A lot of this new technology is expected to be rolled out in the next year. This will incentivise current and new clients to pay for these additional services and bring in more revenue for the firm.
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LON : UTW
Utilitywise
Risks Brexit: Brexit poses the possibility of reduced expenditure. However, as Utilitywise aims to make businesses more cost efficient, it may not be affected if companies wish to safeguard their profits by reducing utility costs. Consultant Attrition: Edison investment research show concerns over consultant attrition. To mitigate the attrition risk the Group has invested heavily in recruitment and on-boarding processes, management structures and training and development. Reliance on key suppliers: A significant proportion of the Utilitywise’s revenues are derived from commissions paid by a small number of energy suppliers. Should these energy suppliers decide in future to engage directly with customers, Utilitywise would suffer loss of revenues related to the commission payable by such energy suppliers. Exposure to underlying customers: Utilitywise’s customers pay the energy supplier directly for the energy consumed, with the Group receiving its commissions from the energy supplier. The Group is, however, at risk should the customer cease trading, usually caused by a customer’s inability to pay for energy used. Security and resilience of Utilitywise’s networks and IT systems: The day-to-day running of its Enterprise Division, for instance is reliant on the in-house developed Quantum CRM system and any extended downtime would impact the Group's ability to transact with the end energy consumer. Liquidity: Utilitywise has a revolving credit facility (RCF). Its cash flow forecast indicates that there is sufficient headroom in order to fund the Group's strategic objectives. We expect to be able to rely on the debt markets to refinance the RCF at its maturity in April 2019. Their debt due within the next year has risen by 30%, which could pose a problem if their client base is reduced. Legislation and Regulatory: It is possible legislation may change in a manner that may require more strict or additional standards of compliance than those currently in effect thereby creating additional costs. In addition, the government may implement legislation requiring changes to current fee structures for TPIs. Should such legislation be passed, there may be a material adverse effect on Utilitywise's financial condition and operating results. Currently, energy procurement is an unregulated market. Should regulation be introduced to cover the Group's activities, the increased regulatory burden could impact on the profits of the Group.
Management Structure & Integrity Brendan Flattery took over as CEO in October from Geoff Thomson, the company’s founder. Mr Flattery is the former CEO at Sage group, and has significant experience of managing European operations for that group, which bodes well for the next phase in Utilitywise’s development into the European market. Mr Thomson is still involved with the company and places emphasis on organic growth over mergers and acquisitions in the coming years. The new management team (CEO and CFO) have made clear their desire to focus on introducing new products and further acquisitions.
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LON : UTW
Utilitywise
Shareholder Structure These are the top institutional shareholders by percentage.
Top 6 shareholders are financial services groups, with Woodford Investment Management owning more than a quarter of shares. (November 1st) Many of the biggest institutional shareholders have raised their stakes in Utilitywise since Brexit showing that investors and analysts have higher expectations for the potential of Utilitywise. DIRECTORS’ SHAREHOLDINGS
Geoffrey Thompson (Executive Chairman) – 8,559,414 (10.98%) Jeremy Middleton (Non-executive director) – 3,287,559 (4.22%) Jon Kempster (CFO) – 21,000 (0.03%) Richard Feigen (Non-executive director) – 68, 675 (0.09%) Paul Hailes (Independent non-executive director) – 45,001 (0.06%) Tom Maxfield (Independent non-executive director) – 66,668 (0.09%)
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