On Tuesday, wholesale energy trading software and services company Energy One (ASX: EOL) released its FY 2024 results to the market. Revenue was up 17% to $52.5 million, with about 88% of that being recurring in nature (though not all of that recurring revenue is software revenue). This result was above the guidance of $51 million.
Energy One made a profit of $1.44 million in FY 2024, down on $2.95 million in FY 2023. As you can see below, it made a loss of around $500k in the first half, followed by a profit of around $1.95 million in the second half, when margins returned to a more normal level. Based on historical levels, I would argue there is still room for margin improvement in the future.
Because Energy One is not a pure software company, I don’t think the annualised recurring revenue (ARR) is helpful as a tool for valuation comparison with a pure software company. However, it does give a hint towards future revenue growth, because it gives a snapshot of the recurring revenue run rate in the final month of the reporting period. At the end of FY 2025, ARR was $49.5 million,12.8% higher than the number reported last year.
In the FY 2024 results, FY 2023 ARR was re-stated slightly lower, with the result that ARR growth is reported as being up 16% in the results (compared to the re-stated FY 2023 ARR). This re-statement was due to the fact that a customer that Energy One was billing in FY 2023 paused their contract, with that contract expected to resume in FY 2025. To be conservative, I would use the lower 12.8% growth rate as a guide to the underlying growth rate in FY 2024.
Importantly, Energy One’s free cash flow turned positive in H2 FY 2024, as you can see below.
This free cash flow, along with the recent capital raising at $4.05, allowed the company to reduce debt from $19.6m to $14.2 million. On the conference call, the CFO said “we’re also going to pay that debt down further in 2025 and look to clear completely in 2026 at current trajectory.” While it wasn’t clear if this was FY 2026 or calendar year 2026, it is a good target either way. What was clear was that Energy One expects to be free cash flow positive in both H1 FY 2025 and H2 FY 2025.
If Energy One pays down its debt, then that will reduce the risk associated with investing in the company. Because the risk of further capital raising will be reduced, and the company will have more options to take opportunities. A strong net cash balance would position the company to benefit from interest rather than have to pay it, and I don’t want the company to pay a dividend again until it has a much stronger balance sheet.
One thing I noticed about this set of results was that lease costs seem to be increasing, when they should be decreasing or flat. However, this was explained by the fact that previously in France one of their premises was month-to-month rental arrangement, not a lease. As a result of signing a lease on that space, some occupancy expenses that were previously accounted for as operating expenses now moved to the lease category. This is the primary cause of the boost in lease costs we see in H2 FY 2024.
The CFO Guy Steel added that they are now negotiating rent reductions in light of the weaker rental market. Therefore we should see lease payments flatline, or even decrease, from here.
The company is planning to spend around $1m in FY 2025 on trying to get the ISO27001 cybersecurity accreditation which it previously opined should help win larger contracts. Despite this, management believe the business is unlikely to need similar cost growth in FY 2025 compared to FY 2024, and the “goal is margin growth,” and “increased profitability.”
On the conference call, management said that the second-half result was a reasonable proxy for profitability in FY 2025. The second half profit was $1.95 million. If we doubled that, we would get $3.9 million net profit after tax. While Energy One made over $3m profit in every trailing 12-month period culminating from December 2020 to December 2022, $3.9m would be a record result. Management declined to give any sort of guidance, but I think it would be reasonable to expect $3.5m profit, at least. I would prefer if the company would not give guidance, because giving guidance means unforeseen setbacks damage the credibility of management. One risk is the potential for the cybersecurity costs to become more than expected.
At the current share price of $4.50, Energy One has a market capitalisation of about $140 million. Therefore, if it made $3.9 million in profit in FY 2025, it would be on 40x earnings at the current price.
Checking In On The Long-Term Thesis
Longer term, I think there is huge potential for margin improvement at Energy One. Hypothetically, a 15% profit margin would seem easily possible for this kind of business, especially once debt is paid off and the business benefits from interest payments.
In this result, the company made a few changes to the revenue assumptions in its impairment testing of business units, found in note 14 of the annual report. It downgraded the revenue growth rate for CQ, but upgraded its EBITDA growth rate. It upgraded revenue and EBITDA growth rates for both Australia and Europe. Australia and CQ Energy are now modeled with a revenue growth rate of 9% and Europe with a growth rate of 14%. All this makes me think that 12% – 13% organic growth is a fair expectation for the entire business.
If it does grow revenue at 12.8%, then it will produce about $95m in FY 2029. If it did a 15% net profit margin at that stage, it would make about $14.25m in profit. If it still traded at $4.50, it would be a P/E ratio of below 10.
Realistically, for a growing company with plenty of recurring revenue, I think the P/E ratio would be closer to 40 than to 10, and potentially a good deal higher if valuations then are anything like what they are now. Even if it only traded at 30x profit, in that scenario, we would do very well from here.
Therefore, on the basis that Energy One has a high level of recurring revenue, good organic growth, honest, competent managers, is focussing more on margins, and is paying down debt, I continue to find the stock attractive at around current prices.
Disclosure: The author of this article owns shares in EOL and will not trade EOL shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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