An Update On The Energy One (ASX: EOL) Takeover Offer & Contract Delay

This morning, Energy One (ASX: EOL) has just received news that the very large contract it expected to sign with a European customer has been delayed indefinitely.

At the time of the annual results, Energy One said:

We have won 2 large accounts in recent months, as well as 4-5 medium accounts and numerous small accounts. Further, we anticipate winning a significant new European-based account in the coming months. This customer is in final contract negotiations with us on what would be a material contract. While there is no guarantee of a signature, we remain confident that our superior technology solution is the best fit for their needs.

Today, the company said:

The significant European prospect we mentioned in the 4E, has been delayed by the customer. The customer’s reasons are not related to the merits of our technology, but more to do with their internal resource and capability to undertake the project at this time. The period of delay is uncertain, but we do expect that the project will not now form part of the revenue stream.

This is a strangely worded statement which I think means that the contract has been delayed indefinitely (and potentially lost completely) but not necessarily lost completely, as it hasn’t been awarded to someone else. I have asked for clarification about this announcement, and will update this article if I receive anything useful.

It would have been wonderful if the news was that Energy One had signed the contract. The news of the delay is therefore definitely bad news, though hardly catastrophic, especially if the contract win is only delayed, not lost completely.

At the Energy One results conference call, the Chairman Andrew Bonwick assured investors that he “will provide [to the independent expert] any information he receives that shareholders believe should be brought to the attention of the independent expert.” This is good news, as it means any shareholder can contribute any evidence that supports a higher valuation for Energy One.

Furthermore, CEO Shaun Ankers reiterated that profits are currently suppressed because the company is investing in growth, but that in the future if and as revenue grows, he would expect to see operating leverage take effect. This is a useful and simple reiteration of why earnings per share probably isn’t the best way to judge Energy One’s value, right now.

To my mind, Energy One is attractive due to its immense future potential.

Since the results conference call, I have continued to hear of other shareholders who believe that the value of Energy One shares is higher than $5.85. It has an international presence, its products are mission critical for its customers, it has long-term demand tailwinds from the roll-out of renewable energy, it is capable of producing high margin recurring or quasi-recurring revenue, and it is well positioned grow organically for a long period of time (albeit probably not very smoothly).

I can’t find many software companies on the ASX that have all these features, and compared to similar companies, Energy One trades at an attractive multiple of around 3.6x annualised recurring revenue, at the current share price of $5.36.

At this stage, I think it is quite likely that STG will not gain the 75% of votes cast necessary to approve a scheme of arrangement at $5.85 per share. It is also possible that the news of this contract delay would cause STG to withdraw their offer. In either event, it is possible that the Energy One share price would fall in the short term. On the other hand, it is also possible that Energy One could receive a competing offer, or that STG could increase its offer if it did not anticipate the requisite shareholder acceptance.

I have already explained my view on the Energy One takeover offer, and the different courses of action I would take as a short term investor in Energy One compared to a long term investor.

As a long term investor, I intend to continue to hold my shares throughout, as my ideal situation would be that Energy One continues to grow revenue for many years and we see that operating leverage kick in some time down the track, boosting profits.

One could argue that this news might make STG walk away from their offer. While that is possible, I’m probably more concerned that this news will assist STG in getting the 75% acceptance they need to take the company over at $5.85.

Whatever ups and downs may come on the Energy One Share Price rollercoaster, my plan is to keep holding my shares as long as the business is heading in the right direction. While this contract delay is a setback, it is not thought to reflect poorly on the Energy One technology, so the contract, or another big one, may still be signed in future years.

If the company were to be taken over by STG, I would be looking for a price between $8 – $10, not $5.85.

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Disclosure: the author of this article owns shares in EOL and will not trade shares in EOL for at least 2 days following the publication of this article. Please keep in mind the author may buy or sell shares after this date. 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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