On Friday morning last week, energy trading software and services company Energy One (ASX: EOL) reported its H1 FY 2025, delivering a resounding wake-up call to the market. Revenue was up 14%, but operating leverage kicked in, and profit came in at $2.46m, up from a painful loss of $508,00 in the first half last year. The Energy One share price responded positively on the day, and in the days since, reaching highs of around $11, a gain of more than 50% since I re-stated my buy recommendation less than a month ago.
While Energy One has previously grown revenue more quickly, the 14% growth was all organic growth, and the half-on-half growth of 5.4% is a good result for a December half, relative to history.
Importantly, the business remained profitable and actually improved its margins half on half, and the trailing twelve months net profit after tax is now $4.4 million.
Moving on to free cash flow, this was the best result since the June 2021 half, with genuine free cash flow coming in at almost $1.2 million. This allowed net debt to decrease from $14.2 million in June 2024 to $13 million in December 2024. The next big milestone for Energy One will be to extinguish its debt and return the balance sheet to strength. In the ideal scenario, it will do this without raising capital, but with the strong share price increase, the company could now pay off its debt with a relatively small capital raising.
Due to the need to pay off debt, dividends remained at zero.
Energy One H1 FY 2025 Operational Developments
Firstly, the company said it expects to achieve ISO27001 certification in 2025. This has been a long drawn-out process. I fear its delay or extension, and I will be somewhat relieved once it is achieved.
Of the three coverage maps presented in the FY 2024 results, Energy One only updated its physical power coverage map, shown below. I find it difficult to track progress by comparing maps between presentations, but it seems to me that Energy One implemented coverage in a handful of new countries in central and eastern Europe, with plans to cover all of Europe by the end of 2026.
Importantly, the company said that “for one customer, we provide contracts software from UK, power operations from France, Gas operations from Belgium – and the night shift from Adelaide. Truly global solutions.” This provides some proof of concept support for the company’s 24/7 services offering.
Revenue from the European operations was up 17% to $16.2m in H1 FY 2025, with the software license sales making up the lion’s share of that number, as you can see below.
Meanwhile, Australian revenue was up a more modest 11%, with software licenses the largest segment, but with meaningful contributions from the “support, hosting and other services” segment and the “operations support and advisory” segment.
Overall, the software license sales remain the main growth driver of the business, with the other segments showing minimal growth (if any) at this stage. This does feed my concern that the purchase of CQ Energy has not really delivered the hoped-for growth.
Energy One Revenue Quality
While I am generally a bit skeptical of unaudited numbers like EBITDA and ARR, I still find Energy One’s presentation of unaudited management metrics to be a useful indicator of company quality. You can see the relevant slide from the H1 FY 2025 presentation, below.
The key takeaways for me are that most of the metrics are moving in the right direction as a result of winning new customers and losing very few. However, the gross margin remains low compared to pure software companies, coming in at 63%. These lower gross margins reflect the relatively high expenses associated with the “operations support and advisory” segment, the “project implementation” segment, and the “support, hosting, and other services” segment.
Overall, it seems the core software business is in good shape, while the services business is reasonably consistent but not really growing. The company refrained from giving specific guidance but said that “the second half of FY25 is expected to be stronger than the first half.”
Over the next few years, the company believes it can deliver organic recurring revenue growth in the range of 15% to 20% per year. If this does occur, profit margins should increase because the company plans to grow costs at a slower rate than that. This indicates that if all goes to plan, profit growth could well be over 20%.
Energy One Share Price Valuation After the 50% Rise
In the last 12 months, Energy One has generated a profit of $4.4 million. In response to these results, the share price gained around 50% to close yesterday at about $11, bringing the company’s market capitalisation to around $344 million. In other words, even ignoring its debt, Energy One trades at around 78x trailing twelve months’ earnings. This figure is much more in line with larger software companies than it has been in the past, suggesting that there is no longer a strong relative basis to claim Energy One is undervalued.
A Sociological Analysis Of Energy One
One possible way of achieving a stronger balance sheet would be for Energy One to raise capital. If that were to happen, I would ideally like to see a tradeable renounceable rights issue, because it provides a very fair way to do a capital raising. That said, Energy One has over the years, treated small shareholders pretty well with capital raisings, so I’m not too worried about the prospect of an unfair capital raising, and a stronger balance sheet probably would help the share price in the short term, even if the dilution stings in the long term.
The strong share price response to the H1 FY 2025 results has stimulated a cacophony of excitement about Energy One, including from some new shareholders who are probably more akin to momentum traders than long-term investors. It is possible the stock price is already overhyped, and even if it isn’t then it could certainly become more hyped up than it is right now.
In this scenario – where fairweather cheerleaders are boosting the stock – the share price could certainly run higher, perhaps to ridiculous levels. And if this does occur, then before long, the share price will likely come tumbling down again. If, as I suspect, many of today’s Energy One stock buyers are motivated by a short-term momentum-following approach to “investing,” then those shareholders will most likely dump Energy One stock just as aggressively as they have been buying, when the share price momentum inevitably falters.
Are Energy One Shares Still A Buy?
Energy One is now easily my largest shareholding, so I don’t plan on buying any more shares at these levels. While the H1 FY 2025 results represent an important step in the right direction for Energy One, it could still take a few years for the company to fix its somewhat stretched balance sheet while still growing revenue above 15%.
That said, Energy One represents a rare confluence of an attractive business model, honest, competent leadership, and plenty of room to grow. If I did not own any shares in Energy One at all, I would buy some shares for the long term.
I still consider Energy One to be a Buy for those who do not own the stock, but I must note the valuation is not nearly as attractive as when it was initially recommended to supporters. On the other hand, the potential for transforming energy systems to drive sustained revenue growth could provide long-term upside, and if the business can sustain its current growth rates, it should grow into its valuation over time.
Personally, Energy One is a long-term investment thesis for me, so I plan to enjoy the strong H1 FY 2025 results and subsequent share price re-rate while keeping in mind that the good times, like the bad, are always passing away. Throughout a long-term multi-year investment journey, there will always be ups and downs, but the true success or failure of Energy One should be measured over a decade (or more), not a year.
Find our past coverage of Energy One via this link.
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 Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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