Capital Raising - explains the recent run up in price. Always insider knowledge...

At least its a fair raising albeit disappointing that they put themselves in a position that they need to do it - The fully underwritten capital raising will be comprised of a non-renounceable non-accelerated 1 for 28 pro-rata entitlement offer (“Offer”) at an offer price of $4.05 per share (“Offer Price”).  

• EOL confirms that it expects to meet (or exceed) revenue guidance issued at the H1 FY2024 report.
• EOL has returned to profitability from January 2024.
• EOL is launching a fully underwritten A$4.3m Capital Raising to strengthen its balance sheet and has received credit approval from its lender National Australia Bank (“NAB”) regarding the extension of its financing facility to be executed prior to 30 June 2024. 

Key points

• revenue increased 23%
• NPAT dropped from $1.2M to loss of $508k
• organic growth is strong. They used to rely on one or two big projects per year. This is changing as they get cross-sell opportunities in Europe. Customers starting to see them as an integrated provider of multiple solutions
• restructure will save $2M/year starting FY25
• Labour costs increased substantially because salaries grew substantially and they wanted to invest for growth. Salaries were high in Australia because of the volatility of energy prices and profits on offer to other market participants in trading and operations.
• learnt a lot from the STG 'mooted' acquisition. Close scrutiny of business helped them identify some changes to make.
• Full year revenue is forecast to be $51M with $45M recurring.
• Confident of return to material profitability but no forecast given.

Their summary of costs

On a statutory basis EBITDA of $3.3M was $1.7M lower than the comparative period. Whereas revenue was up $4.6M (on pcp), we experienced additional costs in the half, primarily related to:

•  Investment in both existing and new staffing of $3M.
•  Acquisition costs related to the mooted STG transaction of $0.4M
•  Restructuring costs (explained below) of $1.1M
•  Cyber incident (non retrievable) costs of $0.3M.
• From a profit / (loss) perspective, additional finance costs of $0.2M and depreciation and amortisation of $0.3M impacted that result. 

Whilst the result is unwelcome, this hasn't changed my thesis or confidence in management. I just read the Half Year Reports and accounts. It carries the same, usual, frankness in their view of the business. It's not a glossy presentation. It is a CEO report. A few pages of text providing some detail. I'd encourage anyone interested to read it.

HELD

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.

New article published

https://www.ctrmcenter.com/blog/energy-ones-european-operations-growing-on-the-back-of-saas-and-managed-services/

Few interesting points

• Energy One Europe has now successfully consolidated all the acquired brands such as Contigo, eZ-nergy and EGGSIS, and the European operation is now working as one seamless entity
• Simon also reported that it had just signed a larger ETRM deal for its Contigo software in the UK for a firm trading in European markets and has recently signed new deals on the scheduling and logistics side of the business.
• Energy One is also offering managed services in several areas and seeing significant growth and opportunities in that area of its business. It now has over forty customers using its managed services ranging from trading on behalf of as per agreed strategies, to out of hours and weekend balancing, dispatch, and auctioning services. “We have some smaller clients who use our managed services extensively and a number of larger ones who use our services for weekend and out of hours coverage,” he told me. “With our follow the sun structure and operations, we can offer all day shifts.”

Juicing EBITDA by what it appears to be capitalising all project related employee expenses. FCF when you take out leases and capitalised dev expenses is pretty poor. Being run for minimal dilution - using share price as currency. To fund acq they raise capital/use scrip when SP is high and take on debt when its low. Only thing that makes market cap less silly is theres a chance a portion of dev capex over last half/year has actually been for development. I don't agree w. capitalising employee expenses for project based work and amortising over 10 years. I know your churn is low but its just misleading - from what I understand these projects can be quite bespoke for individual customer (ie dont enhance broader tech stack). You are basically telling me you guarantee to lock the customer in for 10 yrs after doing project work. I call BS. Underlying revenue growth looks good, they are building a real business but need to do some more work to see if operating leverage is actually there and disentangle acquisitions / bs accounting treatment.

Here is a handy link for someone like me who never had anything to do with industry to understand the basics.

https://www.aemc.gov.au/sites/default/files/content//Five-Minute-Settlement-directions-paper-fact-sheet-FINAL.PDF#:~:text=The%20national%20electricity%20market%20(NEM)%20operates%20as%20a%20market%20where,and%20demand%20is%20matched%20instantaneously.

Five Minute Settlement

National Electricity Market Fact Sheet

This was timely given our current deep dive...

Energy One released their results for FY22. From their release:

Overall a solid result given that this was more a year of consolidation for Energy One as they bed down several acquisitions made in late 2021. They are positioning themselves to be the leader in the energy market and have stated that they will have first mover advantage with the move towards a Software-With-A-Service (Swas) model.

Guidance for FY23 was also given:

• Revenue = $44m (37% increase on FY22)
• EBIDTA = $12.5m (33% increase on FY22)

There will be an investor briefing on Thursday 25th of August at 10am to discuss the results.

Disc: Held IRL and on Strawman.