In the spirit of @PortfolioPlus respectfully questioning what he sees as price exuberance in a popular stock and @Strawman‘s appeal for energetic push back (while playing the straw, not the man), here are some Risks for EOL that I see.

Please come back with any risks you think I may have missed. I’ve tried to call out what I see as risks here but likely have blind spots as It’s a large position for me that I want to see do well.

Growth, Margins and Valuation

EOL have seen falling margins in recent years as they invest for growth.

Margins have also been impacted in FY24 by adverse effects in the cyber attack which required remediation and investment to improve defences as well as a failed (and poorly handled) opportunistic takeover attempt, and interest rates raising their debt servicing requirements despite falling debt levels.

This saw Statutory NPAT fall 51% in FY24, after falling in both FY23 and FY22 by 18% and 3% respectively.

So despite growing Revenue at an average of 24% p.a. over the last 3 years, NPAT has fallen by 61% over that period.

During this time they raised debt and equity to fund M&A which has added scale but potential fragility to operations and financials.

Financial objectives of growing revenue AND margins could be ambitious as these are often competing objectives to be traded off against each other.

There is a risk that this is a perpetual ‘Jam tomorrow’ story, where the jam never arrives.

One reason for the current market pricing may be a tug of war between believers like myself who have faith in managements ability to realise the obvious potential and sceptics looking at a trailing PE multiple of 98x and wanting to see proof of NPAT margin growth, debt repayment and all the other good things management are projecting.

Funding – Debt & Equity

Multiple Equity Raises – some for M&A, some for Debt paydown – have diluted shareholders over time and the return on these investments is not transparent.

Debt is high for a company of this size – and the recent interest rate rises have increased the debt servicing burden by 25% having a relatively large impact on the bottom line.

This net debt of $14.2m is due to be paid in FY27 but the CFO plans to repay it by FY26 requiring a big uplift in FCF that does not look imminent based on recent financial trajectory.

M&A cuts both ways

Lots of acquisitions in the past – how well these have been bedded in remains unclear. If there’s a level of tech debt built up through this, it will hopefully be addressed by the new IT systems being implemented at present. However, these are also not without risk – as we’ve seen from outages by Optus and Microsoft / Crowdstrike.

The takeover attempt in 2023 at $5.85 seriously contemplated by the board, then scaled back to $5.15 and rejected by the board highlighted a few cracks which are now being remedied, predominantly with IT spend.

This included losing experienced, aligned (16% holding) board member Vaughan Busby in the process as he (rightly in my opinion) opposed the takeover from the start.

Key Person Risk

The long tenure of board and management with skin in the game can be a real asset while it lasts but can create a void when a key person leaves.

If CEO Sean Ankers were to leave or Chair Ian Ferrier were to leave or sell his holding, this would be a big red flag.

In smaller, fast growing businesses, management can have an outsized impact compared to larger, more established, stable businesses.

There has also been an Org Restructure that has resulted in senior country heads departing and effectively being replaced by new functional heads. This kind of restructure can lead to a loss of corporate memory that has been built up over many years.

It also places a lot more focus on the CEO to get the new hires up and running, aligned with culture, etc.

Regulated Industry

Energy Industries are heavily regulated to ensure adequate, affordable supply in the advanced markets that EOL operates in.

This means that solutions may need to accommodate different regulatory frameworks / industry dynamics across different markets.

Also, the reg requirements in any given market are prone to change with elections, lobbying, etc.

Populist backlash from right of centre parties in Europe playing on cost of living pressures and xenophobia have the potential to eliminate / soften climate forward policies which could slow the transition to renewables that EOL supports and benefits from. The CEO indirectly called this risk out in the FY24 earnings call with reference to the on again off again transition policies implemented / cancelled by Australian governments.

For example, Government funded, large scale nuclear would likely suppress renewable investment and thereby opportunity for EOL to service a large number of renewable start ups.

Barriers to entry

Adjacent technologies pointed at a large energy markets could make inroads.

I’m often cautious of small companies chasing big markets – as these large potential profit pools can attract well resourced players seeking growth from adjacent / core markets.

A big competitive barrier is the in-house systems used by large players. If these are expanded / made available to smaller players this could represent a threat – however, these systems are likely specific to a particular vertical / geography so may have limited scope.