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.

I attended the EOL FY24 Call today. They said a recording will soon be up on their IR site. Here are my thoughts.

It’s not a wildly complex business but there are a lot of moving parts. Happily they are all pointing in the same direction - hoping to catch a huge tailwind and take a large share of a small but growing niche. That being as “A leading independent global supplier of energy trading and risk management (ETRM) software systems and services”.

They are well diversified across customer, geography and industry segment. So as long as energy generation remains a large (and hopefully evolving) industry they should not be overly subject to customer / industry issues like some other picks and shovels providers are.

EOL seems very deliberately well positioned to benefit from the drive to renewables – there's some reg / sovereign risk in all of this but they are yet to enter the US where this reg risk appears most acute.

Costs

The One-Off Costs impacting 1H 24 are really thought about as investments as are the increase in run rate costs (except for the increase in interest costs due to rates rising), mainly the uptick in employee expenses.

They are very much building for the future to capture the growth they see coming down the pipe.

The 28% increase in employee costs (vs 17% Revenue growth) in FY24 is seen as a one off and includes an Org Restructure. From here on in, employee costs should grow as a % of revenue growth as they continue to invest in people but with cost discipline to grow margins – so this should not be a drag on Op Leverage going forward. Something to watch…

On the interest costs / debt, they plan to repay the debt in full by FY26 meaning they will need to generate FCF to clear the (net) drawn $14.2m (of a $25m facility) in the next 2 years.

This is a big step up from the $1.9m FCF in FY24 ($1.2 in FY23, 2.0 in FY22).

Their financial focus is on growing both revenue and margins so if they are successful higher FCF should be a happy byproduct and reducing debt will cut out ~$2m of interest p.a. adding to the momentum.

Presentation

The 36 page Preso was detailed and they called out a number of items in it - https://www.marketindex.com.au/asx/eol/announcements/energy-one-fy-2024-investor-presentation-2A1542127.

Net Revenue Retention of 108% with Churn remaining low at 3.5% (up slightly from 2.6% in FY23). I take this to mean existing customers spent 12% more in FY24 (108/96.5). If I'm right about this, it should give a level of confidence in Revenue growth as long as churn remains low and as new products come to market to up / cross sell into existing client base.

Interesting to see LTV/CAC up to 41x (vs 38.1x in FY23, 29.4x in FY22, 28.9x in FY21). They are refocusing their efforts on marketing but it’s not clear to me if this is driving higher LTV or because of it.

Competition & Market Penetration

They seem to have a first mover advantage on offerings like "one stop shop" and ‘follow the sun’ support services. They also have greater coverage of European and Australian markets than competitors – who tend to be more single country focused.

Australia is a larger, “very profitable” and more mature market for them but Europe is where the growth runway is – I think of this as parlaying their stable Australian earnings into a bigger opportunity in Europe. Also using their Australian expertise (well developed energy market) and products to service European customers.

Slide 24 of the Preso gives a good breakdown of their Australian operations. Namely:

• 50%+ of installed energy in the National Energy Market (NEM) passes through their software
• They are effectively 4th largest generator in the NEM – although they are only a broker, so don’t take any energy price risk.
• ~13% of east coast gas market volume managed by EOL - excluding LNG.

Management

Management talk calmly but enthusiastically about the business - they seem to know it very well, and gave plenty of time for investor questions.

They also seem to understand the market and their customer needs very well. At the risk of stating the obvious, staying very close to this changing industry and their customers seems key as the shift to renewables gains pace – the electricity grids in developed economies need to triple in coming years to cope with the electrification required to hit climate targets!

However, their competitive position and value prop compared to peers is hard to validate from an outside view (for me at least). Mgmt tenure and skin in the game give some comfort in this regard.

Disc: Held – 7% position.

@Valueinvestor0909 gave a good, visual summary of the results that EOL dropped while everyone was at lunch today.

I'll attend the conf call 11am tomorrow and feed back if anything material arises there.

Here's my thoughts while they're fresh / unfiltered...

The good

89% Recurring Revenue, 93% Gross Margins - both stable over the last 3 years.

Revenue Growth 16.5% - all organic.

The not so good

NPAT halved as cost growth outpaced Revenue growth for the third year in a row (by my measure). I look at what I call "Net OpEx". This is effectively EBIT minus Gross Profit, to capture all operating expenses by removing COGS, Interest and Tax).

Tough year including failed (cynical) M&A Approach, Cyber attack, Org Restructure, expensive skilled recruitment.

The context

NPAT down 51% partly due to $1.8m one-off costs, would have been up 10% otherwise, and up 27% if interest rate rises did not increase finance costs by 25% / $0.5m (vs 17% Revenue Growth - there's the Op Leverage).

Built out corporate infrastructure, incl CRM, cyber defences, etc as well as follow the sun support capability to support future growth.

Essentially front loading costs to support bigger scale and generate growth in organic revenue – that may still be augmented by M&A.

As they already have debt (albeit recently restructured so that 85% of it is maturing in 2.5 years), they will probably need another Cap Raise if future M&A opportunities arise.

Having debt for a business of this size (and in tech) is not ideal, however with 90% recurring revenue and 2.2x Interest coverage (down from 3.9x in FY23) and Debt / Equity of 36% (down from 51% in FY23), I’d say it’s manageable but not expandable.

That said, they are likely now becoming a more attractive target for acquisition as they complete their cyber security ISO certification and corporate infrastructure build out – commensurate with their growing size / focus on organic growth / emerging maturity.

This little business is growing up

This is still a small business with a market cap of $135m (at a SP$ of $4.50), revenue of $52m, but has been profitable for a decade, has aligned management with 35% ownership and average Board tenure of 16 years.

Price/Sales of 2.6x is in the bottom quartile (18%) for it’s last 5 years but Statutory PE is 94x. Adjusted for One-Offs PE is 42x so still lots of expectation baked in for a business growing organically at 17%.

That said, it should have stable NPAT Margins of 10%+ over time (got to 13% in FY21 & 1% in FY22). If the perceived long runway for growth can support a PE of 25x (8 year average PE is 32x), a 10% RRR would only need a 5 year Revenue CAGR of 13% and it’s not been that low in the last 8 years at least, albeit aided by M&A in many of those years.

It’s been a wait for this business to show its potential and the wait goes on but it is looking better to my eyes.

There are growing pains for sure and the failed / bounced lowball M&A approach last year highlighted to management where they were lacking from a corporate structure POV which they are remedying. The Cyber attack was not as bad as could have been (dumb luck?) but showed where they need to tighten up.

They are doing the things you would hope in response to these issues and being as proactive as their size and growth profile permit.

Disc: Held – 7% position.

Energyone provided an FY24 result update. Optically it looks terrible thanks to very weak 1H ( that was already known to the market)

Now if we look at the result and compare half-on-half

If we look at the expenses, 1H shows some one-off charge ( 1.8m worth). Although Salary cost increased to 28% in FY24 compared to FY23

Debt has been reduced from 22m to 16m ( they did capital raise in 2H and as a result Share count has increased from 27m to 31.5m)

It is roughly trading at 135m market cap

with 52m Revenue ( 89% recurring revenue) in FY24

There is a con call tomorrow ( unfortunately, I won't be able to attend)

FY25 guidance or commentary will be important for the valuation.

Hopefully, all one-off will be behind them, 1H FY25 should be much much better than 1hFY24

I note the appointment of Mike Ryan as a board member. ive known Mike for over 30 years, originally he was my account manager at JBW when I was managing a large equity fund. he is a good guy and has done well in the finance industry ending up, I believe, as CEO of Shaw Partners. he has a bit of Kiwi mongrel about him. The thing that concerns me is he is a finance guy, not too sure what to read into that and what he brings to EOL and whether they think they need those skills. -ecm, m&A, equity mkts. maybe overreading it, maybe he is just good mates with the chair, who if i recall is also from the finance industry.

There is some interesting insight offered by the CEO presentation to the AGM today.

A year ago the board was advised they could get $6/share so they embarked on a sale process. They ended up rejecting the offer and it has had the effect to divert management attention in the year after they had a major expansion into Europe and it will impact this years result. They will announce the impact with the 1st half results in Feb.

From the transcript.

NBIO Process

As announced, the Company has experienced inbound interest in a variety of corporate transactions over recent years. About a year ago the Board formed a view following advice from advisers that we could conduct a successful sale at or about $6.00 per share. Therefore, we embarked upon a sale process. The process, which was all consuming for our small group of executives and the Board, was undertaken while the company embarked upon our innovative expansion of our global offering of our SAS business in the northern and southern hemispheres.

The result of the sale process was disappointing with an offer emerging of $5.15, rejected by the Board last month.

Looking forward

The distraction of management time from running the business to dealing with due diligence etc. was very costly and the outcome was further impacted by the hacking which took place during August due to the need to protect the customer and employee data and manage the Company’s response. Now, with certain changes to management, we have resumed normal business.

The distraction of the sale process and set-back will have adverse consequences for this years result compared to our initial budget but the Board has confidence in its core management and market position. We will resume the previous upward trajectory, the benefits of which will continue to become apparent over the next 12 months. The timing of the attempted sale was unfortunate and costly with the consequence that there will be no dividend for 2023.

The Board will consider providing an FY24 outlook after the release of the 2024 1H results in February.

Energy One has signed its largest software deal in Europe to date.

https://www.energyone.com/energy-one-closes-deal-increasing-coverage-in-cee-the-baltics-and-southern-europe/?utm_content=267231833&utm_medium=social&utm_source=linkedin&hss_channel=lcp-101417

Vaughn Busby has resigned. Not great losing him, but it was bound to happen with his opposition to a takeover supported by the rest of the board.

Congrats to EOL holders -- it's been a tough run of late, but news of a potential takeover does help validate the view that there was good value to be had.

I saw this on Twitter today, which some might find helpful:

https://twitter.com/brody_fn_/status/1695965151508222347

EOL seem to be making progress. Announcements over the past 6 weeks have said

• Energy One Ltd (Energy One) has entered into a long-term framework agreement with Shell Energy Australia (Shell) to use Energy One’s solutions for its growing portfolio of battery, demand response, renewable and other generation assets.
• They are also in have a POC with a large European energy generator with a mid-year decision about whether they are successful.
• They have their first European customer using Australia as a night shift
• Website and sales capability have been improved now they have their 24/7, Euro/Australia service model
• Have maintained their full year guidance even though half-year result was lower than expected. FY23 of revenues increasing 37% over FY22 to be in excess of $44M, and EBITDA growing 33% over FY22 to $12.5M and re-iterate that outlook.

They are the positive aspects.

On the risks side

• The really large acquisition is reported to be going will but it is still early days
• Debt is high because of acquisition
• Intangibles are high because of acquisition and history of capitalising software dev costs
• They are reporting EBITDA so they can exclude higher interest and amortisation which will impact NPAT

I really enjoyed listening to the recording of the $EOL Deep Dive. I have been following it for a while (ever since Claude Walker put it on my watch list professing it to be his "Stock to Change Your Life"eary last year.) All things energy are the core of my "wheelhouse", although currently I hold no energy stocks, but have enjoyed great gains over the last 2 years, offsetting some of my other losses visible here to all!

@Strawman opened the deep dive by summarising $EOL from revenue growth 2017 to 2022 and outlook for 2023. He rightly noted that there have been a number of acquisitions. This finally prompted me to attempt an analysis of the impact of the acquisitions, as management have consistently stated how much revenue (and EBITDA) contribution each of the 4 acquired businesses was expected to make in the first full financial year after closing.

In constructing the table below, for each year I taken Revenue and Other Income, and from that listed the contribution of revenue from each acquisition in its first full financial year, as announced on deal completion. Note that I have not made any corrections for the impact of FX movements between announcement and the FY results. So it is a ballpark analysis only.

Furthermore, I have kept the contribution of each acquisition to the 'Acquisition Contribution" total constant in subsequent years. This means that in the second full financial year after acquisition, growth in the acquisition is deemed to contribute to organic growth.

Table: Analysis of Organic and Inorganic Revenu Growth for $EOL (A$000)

I have then in the rightmost two columns calculated the revenue CAGRs. The one I place most significance on is the period 2019 to 2023 (Forecast numbers), as these are the most recent 4 years where Year 1 is purely organic. The reason for doing this is that you often get big CAGRs when you start from a very small revenue base. It is a trick growth company CEOs are adept at doing ... go back far enough and your CAGR is infinite!

$EOL has over the period by my estimation delivered an organic revenue CAGR of c. 10%. I will be looking for evidence that they can leverage the acquisitions to drive higher revenue growthin future. For all the talk of industry tailwinds, their organic growth by my estimation is modest.

One reason I do not hold $EOL is that it is unclear to me whether they will achieve strong growth. My understanding is that the market for energy management software solutions in competitive. It was 10+ years ago when I was a "buyer" and I have no reason to believe that has changed. Claiming "15%" (UK) and "less than 10%" (Europe) market shares does not in my mind demonstrate a strong starting position. (Question for managment meeting: How are they measuring market share?)

I will expand on some of these points further, connecting to the discussion and questions from the "Deep Dive".

Big Customers v. Small Customers

The Deep Dive discussion debated $EOL's customer mix, and the role of large and small customers in the future. As discussed, existing customers in a market are one criterion considered by prospective new clients. In Australia, $EOL has strong credentials with AGL, Energy Australia and Alinta Energy among the client base. The European acquisitions have also brought some big customers into the portfolio: Centrica and SSE in the UK and EON (Europe or UK?) as at early 2021. There will be more as a result of the eZ-Energy and Egssis acquisitions. We don't know how many of these customers have multiple products - this is important.

For me, success is all about the ability to acquire new large customers organically. I would see newsflow on this as a positive BUY signal, and I am waiting for it.

What is my obsession with big customers? Simple - to win in energy you have to win these. True, during the energy transition, many smaller players and new market entrants are going to build A LOT of standalone energy assets (wind farms, solar farms, battery installations, pumped hydro, peaker plants etc. etc.) and we will continue to see the entry and exit of suppliers/retailers as market fortunes ebb and flow. But energy is a scale game. This is because medium and large players in any market will over time acquire businesses and individual assets of the new entrants and developers. This is how competitive (i.e. open) energy markets have evolved. You need medium and large customers in your customer base because they will do the lion's share of acqusition and owns the lion's share of the addressible market.

If the acquirer is a new market entrant, then they might adopt the systems used by the target, otherwise they are likely to impose their systems. For example, Shell recently acquired ERM to enter the Australia electricity supply market as part of its global strategy to transition from hydrocarbons to electricity. As this was one of the early moves by Shell of this kind, it will be unteresting to know whether they adopted $ERM's electricity trading systems. I expect they will have for some, but of course Shell has existing and developed systems for its gas, LNG and oil trading. I've never seen the $EOL promotions use Shell or ERM badges, so that's a key one to win in Australia and globally! Shell will in time become a big global electricity generator, distributor, trader and supplier.

Pricing is clearly also a scale game. I expect $EOL's pricing will be driven by numbers of products (x-of-12), number of seats (licences) per product, and potentially even number/scale of assets managed perhaps measured by MWh, (Question for Management Meeting - What is the Contracted Revenue Model?). If you go into the trading room of one of the large utilities, you'll find a large open plan space with traders and analysts, including the operation team that works shifts, 24/7/365. One large utility with have 10 to 20 or more times the revenue opportunity of a smaller asset developer. Furthermore, asset developers will often contract all the offtake to one of the integrated players via a PPA (power purchase agreement), in which case they are unlikely to use any/many systems at all. So tracking the number of new energy projects, while an indicator or market growth, perhaps overstates the market opportunity for $EOL.

If we think of $EOL as an early stage player aspiring to be the $WTC of the energy industry, then we just have to look to the kinds of metrics that $WTC touts: e.g. 41 out of 50 of the world's largest logistics firms are customers.

So for me, big customers are what it is all about.

(Note: this contrasts to other enterprise software providers like $XRO and $ELO, where the market for SME enterprises is huge and measured in millions. Industry structure in energy is different.)

One area that I'd like to understand better is the contract energy trading services model. This is a niche which probably only makes sense for small and medium size customers, as big customers are likely to do the work in-house because it is a core capability. It will be interesting to see what growth the CQ Energy acquisition can drive in Australia. I am unclear how material this can be.

It would also be good to understand the extent to which existing customers grow revenue over time. I wonder if we could persuade $EOL to adopt cohort revenue reporting, as many of our favourite SaaS companies do?

Conclusion

$EOL is a small player in a big global pool. The portfolio of products is impressive and should position them well to compete. But at the moment, I don't see a compelling growth investment proposition at the current valuation.

I am closely monitoring:

• Organic wins of new large customers, particularly in Europe
• Evidence that revenue synergies from acquisitions lead to an uptick in revenue growth. Organic growth of 15% p.a.+ up from 10% CAGR estimated would be a good start
• Better understanding of the potential of the contract operations service opportunity, so will tune in to future results calls when I can
• Evidence of better capital management. Given their global aspiration, paying a dividend now is just plain dumb, when you have to go cap in hand for more capital. (If they have advisors on this, they should change them!)

I am minded to agree with @PinchOfSalt 's bear case valuation of $3.00 ballpark. I'll add mine when and if I get to it.

Disc: Not held in RL and SM, but watching closely.

The management / board of Energy One has a significant holding in the company of roughly 50%. See approximate holdings below based on TIKR data and last annual report. It wont be 100% correct but gives you a good idea. I will update when the next report gets released (which should be soon). I assume Guy Steele now has a holding too after being appointed as CFO and Company Sectary on 28 JUN 21.

One potential concern of this structure is that this group can hold a significant amount of power and can be less friendly to smaller shareholders than they would otherwise be, even if unintentional. Looking at the Investor page of the website and the last annual report it is very much a case of the bare minimum which would support the fact they are focussed on larger shareholders.

This is something to keep in mind but to counter this there is an interesting story from Claude Walker in the Baby Giants podcast which implies management conducted an SPP for smaller shareholders after receiving feedback from smaller shareholders who were unhappy about how they were treated in a capital raising. I have not been able to confirm but is reassuring from a small shareholder perspective.

As to the team itself, Ian Ferrier is an impressive businessman with significant experience across various businesses and is Chairman of the Goodman group and co-founder of Ferrier Hodgson. Interestingly he holds a very small parcel of around $210K of Goodman Group shares as his only other holding listed on TIKR so he has significantly more of his wealth invested in Energy One

Vaughan Busby holds a few other directorships including Chairman of Scidev and of Netlogix. He is also a non executive director of Energy Queensland which is the state government entity that owns the Energy distributors (Formerly Energex and Ergon) assets.

Shaun Ankers was appointed CEO in 2008 so has been at the wheel for a considerable time.

Clearly this group have skin in the game and are very focussed on seeing it perform well and having shareholder interests (hopefully big and small) at heart.

Energy One completes the acquisition of CQ Energy for a total outlay of 36 million

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02513626-2A1370274?access_token=83ff96335c2d45a094df02a206a39ff4

Energy One released their results for 1H FY22 yesterday. From their release:

Revenue was fairly flat and management have stated this was due to covid travel restrictions minimising their ability to win big clients. I see this half as a half of consolidation for the business as they try and bed down their recent acquisition of Egssis and their entrance into the European energy markets. CQ was also acquired although this will be reflected in the coming half year.

EOL operate in a sector with large tailwinds with the transition towards green energy. They have mentioned that they will be operating as a Software-with-a-service model (Swas) once the CQ acquisition has been completed so it will be interesting to see if they will be able to scale well given the tailwinds afforded to them. Management have stated that they will continue to "profitably grow" but I expect their results to be a bit lumpy over the course of the next few halves/years.

Guidance for the FY22 was given:

• Revenue = $32m
• EBITDA (excluding any more acquisitions and one off costs) = $9.5m

Disc: Held IRL and on Strawman.