Energy One (ASX: EOL) is a niche energy trading software and services company listed in Australia, but with operations in both Australia and Europe. It makes money first by selling energy trading software products and second by providing energy trading services. As such, Energy One serves wholesale energy market participants either by providing them with the software to run their operations or by allowing them to outsource their energy trading operations to Energy One.
Over the past few years, Energy One has invested heavily in building out its services division and improving its cybersecurity (after suffering some set-backs due to a malicious actor). Previously it has a received takeover at just above $5 per share, and it is possible that the recent share price rise might be due to the potential for other such offers.
Energy One shares have performed strongly over the last 10 years, and I am optimistic that shares will continue to perform well over the next 10 years, because the company generates sticky, largely recurring revenue, it is run by honest and competent leaders, and it has plenty of room to grow.
Crucially, I also think the quality of Energy One’s business is improving over time and that it is somewhat overlooked due to the stock being small and illiquid. This illiquidity means it is hard to get a true gauge of where the market value sits because the market isn’t as efficient. Over time it is possible that the stock could become more liquid.
Energy One has been growing its revenue by a combination of winning new clients, developing new products and services, and purchasing other small companies that serve the same or similar customers. The vast majority of its revenue is recurring in nature because the software products are very sticky and, for now, at least, there are not too many competitors providing energy trading services. Energy One doesn’t have anywhere such high-quality revenue as Pro Medicus, but you could argue it is somewhat similar to RPMGlobal, a mining software company that also makes a considerable amount of project-based advisory and consulting revenue.
If you accept my argument that the quality of Energy One’s revenue is somewhat analogous to RPM Global, you may be interested in comparing revenue multiples of the two companies over the decade to 5 February, 2025. Energy One’s blended gross margins are similar, or better than RPM Global’s gross margins, by my reckoning, and it grew revenue a bit faster in FY 2024, so I consider the chart below a mild indication that Energy One shares are probably cheaper than RPM Global shares. In any event, I own shares in both companies.
One potential explanation for why the market has a more positive view of RPM Global than Energy One (based on comparing revenue multiples) is that Energy One has had patchy profitability, as you can see in the chart below.
The company says that the H1 FY 2024 profit crash was influenced by a number of one-off factors, including $1.1m of restructuring costs (reducing one layer of management), $400,000 dealing with the failed takeover attempt, and $300,000 dealing with the aforementioned cyber incident. In any event, based on history, Energy One seems to be capable of net profit after tax margins in the 5% – 15% range.
With revenue of $52 million in FY 2025, even 10% per annum revenue growth would take Energy One to $83 million in 5 years, which would be a profit of $8.3 million with 10% net profit margins. At the current price of $6.98, Energy One has a market capitalisation of about $230 million, which would imply a P/E ratio of 27 (in five years).
Personally, I think Energy One will likely perform better than described above, and in that case, I also think the market will give it a higher P/E ratio. There is no guarantee that the market will award a premium P/E multiple for growing businesses with sticky, recurring revenue in 5 years, but it certainly does today.
No investment in a microcap is without significant risks, and Energy One has its share. For example, the investment in expanding into services via the acquisition of CQ Energy is yet to truly pay off, and quite often serial acquirers eventually make a mistake. That is what I worry about most with Energy One.
On top of that, cybersecurity expenses are significant. The company has been pursuing ISO27001 certification for quite some time and was previously the target of cybercriminals. Furthermore, Energy One benefits from the proliferation of renewable energy generation, but energy policy is often quite contentious and it is certainly possible that legislative changes could impact the industry one way or another.
Despite many ups and downs, long-serving CEO Shaun Ankers has taken Energy One from revenue of under $5m in FY 2017 to revenue of over $50m in FY 2024. Its high recurring revenue base and its potential to profit from the growing penetration of renewable energy and battery storage make it a compelling long-term play.
While the risks are real— and I worry about cybersecurity and acquisition risks—the trajectory remains promising, and I see no reason why it could not be a significantly larger business in a decade. Energy One has come a long way since I first bought shares in late 2018, but despite that progress I still believe Energy One is under-appreciated by the broader market.
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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