Eco Investor March 2017

Pre-Dividend Securities

Energy Action Downgraded to Pre-Dividend Security

Eco Investor has downgraded Energy Action to a pre-dividend security as the company has suspended its interim dividend following a disappointing profit result.

The company said the lack of a dividend was due to the decline in its operating net profit after tax, which fell 45 per cent to $0.8 million. But its net profit was even lower at $0.29 million. The good side to this is that it was better than the corresponding December 2015 interim loss of $0.6 million.

Given the high profile of Australia's energy issues and the savings that corporates can make from energy efficiency, it's easy to think that Energy Action should be bowled over in the rush to save money. Clearly that isn't happening, or if it is there is much more to the story.

Interim chief executive Michael Fahey said the result was impacted by unprecedented volatility in energy markets which resulted in lower revenues in the procurement business where revenue fell 9 per cent. Total revenue fell 10 per cent to $15.6 million.

Factors behind the volatility included the announcement of the closure of Hazelwood power station, South Australian blackouts and the lack of affordably priced gas. The average cost per megawatt hour rose by 45 per cent to $77.34. There were higher prices in all States and especially in South Australia.

The price volatility led to numerous instances of energy retailers withdrawing agreed pricing or suspending energy pricing during certain periods. Offer validity periods were also shortened, in some cases to hours, not days, said the company. There were many instances of deferred or reworked procurement processes and higher client churn.

The number of Energy Action's energy auctions fell to 704 from 969 in the December 2015 half. As prices rose the average length of contracts continued to shorten and reached 19 months, down from 23 months. The number of electricity tenders and the average price per tender also declined. This remains a very competitive area of the market, especially amongst large clients, said the company.

A takeout seems to be that price stability brings certainty and clients can take out longer and bigger contracts. But given the current adversarial politics around energy policy, stability does not seem to be in the offing.

Revenue also fell in the Projects & Advisory Services (PAS) business, by 32 per cent to $3 million. This revenue is dependent on the timing of project works. In the prior period a large building services upgrade was undertaken but there was no similar project in the December half. A similar sized project is scheduled for the second half, it said, offering hope of a bounce back. A review of the PAS business resulted in the company focusing on the higher margin consulting business rather than on lower margin supply and install work. Thus five employees left the business in January.

The higher margin consulting business grew by 3 per cent and PAS' order book also grew. About $4 million of work is scheduled to be delivered in the second half.

Energy Actionís December half year revenue.

Mr Fahey said "The company has remained profitable despite extremely difficult market conditions that disrupted business operations for both Energy Action and our clients and has seen several market participants exit the market."

He said progress was made on some strategic initiatives including establishing the Embedded Networks business and growing the customer bases for Energy Metrics Platinum, Structured Product and Expert Monitoring and Diagnostic Services. Clients are looking for solutions to mitigate the impact of the higher energy prices. The Embedded Networks, Structured Products and Energy Metrics Platinum services provide clients with new ways to manage their energy needs, and he expects further progress in the second half.

Mr Fahey expects the operating net profit after tax for 2016-17 to be between $2.4 million and $2.7 million as earnings should be weighted towards the second half. Hopefully this will be enough for Energy Action to re-commence its dividend and the company said it expects to do so for the full year results.

Meanwhile the results added to the downward pressure on the company's share price which has been declining since its all time high of $4.35 in December 2013 and is now only marginally above its all time low of 74 cents in February 2016. At 87 cents there is plenty off room for a turnaround if and when it happens. (ASX: EAX)





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