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1 Further Reason to add Utilitywise #UTW to your Watchlist

The content of this blog (or content associated with it) is not intended as investment advice. The author holds an interest in the company mentioned. Please do your own research.

Utilitywise (UTW)
Share Price: 53p
Market Capitalisation: 41.61m

What Do They Do?
Utilitywise is a leading independent utility cost management consultancy. The Group has established trading relationships with a number of major UK and European energy suppliers and provides services to its customers designed to assist them in achieving better value out of their energy contracts, reduced energy consumption and a lower carbon footprint.


To read my previous blog on Utilitywise click here

1 Further Reason to add Utilitywise #UTW to your Watchlist



This may seem like an odd reason to add a company to your watchlist but uncertainty can create short term weakness in the share price and therefore be a great investment opportunity in the mid to long term. Of course you need to know what this uncertainty is based on and whether it is indeed, short term.

I have a high degree of confidence it is.

WHAT IS THE UNCERTAINTY BASED UPON?

At the centre of this uncertainty has been the adoption of a new accounting standard (IFRS 15). They’ve stated that this will have, “No impact on commercial activities or cash flows but change expected to lead to close correlation between accounting earnings and operating cash flows”. Although it will, “Material impact on future accounting revenue recognition and, therefore, profits”.

To try to explain, previously, Utilitywise would receive money from energy suppliers as soon as a new, or renewed, contract with a customer was signed, even though that contract may not start until the next financial year.

They also obtained significant cash advances from certain major utility suppliers, paid against future contracts delivered by the Group for those suppliers.

Over the term of this contract, the customer may use less energy than previously estimated, causing a clawback of commision by the energy supplier from Utilitywise.

The new accounting standard means, they will not only, not take payment until a contract starts (rather than signed) but the amount they take will be reduced to 80% of the contract value, hopefully preventing them having to pay commision back.

If at the end of the contract the customer has used more than the amount estimated, Utilitywise will receive more comission. So it reduces revenue and earnings for this year, ended 31st July 2017 but a lot of this revenue and earnings will be pushed into future financial years.

Their order book value, as at 1st August 2017 (stated after the adoption of IFRS 15) was £46.1m, of which around £26.3m is expected to be recognised as revenue during the financial year ended 31 July 2018, as a result of the adoption of IFRS 15.

There have been other issues related to the one above but they are tackling these problems, as you can read in my previous blog by clicking here.

FURTHER UNCERTAINTY

To add to this uncertainty, Utilitywise announced, this week, that their full year results will now be released on 21st November, rather than on 17th October, as was originally reported.

The delay, they’ve explained is because they are to, “publish its results for the year to 31 July 2017 under the existing accounting standard, IAS 18 (Revenue), but would also include a reconciliation of the results to the equivalent position presented in accordance with IFRS 15.”

This is acceptable but nevertheless creates more uncertainty, especially when a sentence like this is included, in the release, “As a result of the additional work required to complete this exercise, along with certain additional detailed work being carried out in respect of the Group’s estimates relating to energy consumption across its portfolio of energy contracts, the Group’s year-end external audit process is now expected to take longer to complete than in previous years.”

At a time when their results would’ve provided some clarity, on exactly what impact the new reporing standard will have, this type of release doesn’t help instil confidence.

HOW MUCH WILL THEIR EARNINGS BE AFFECTED THIS YEAR?

In a trading update on 24 August 2017, UTW stated:

The Board expects to report Group revenue for the year of c. 3% higher than the prior year and adjusted profit before tax of c. 40% lower than the prior year.

Last year’s results for the year ended 31 July 2016 showed revenue of £84.4m, so a 3% increase would equal £86.9m for this year (ended 31st July 2017).

Last year profit before tax was £18.4m, so a 40% reduction in this would equal £7.36m.

With a market cap of £41m this means Utilitywise’s price earnings ratio (P/E) is below 6. Their average P/E over the last 4 years has been 15, which would equal a market cap of £110m. It’s also worth noting that this £7.36m pre-tax profit is not only 40% lower than last year but is historically low, mainly due to exceptional items, like their new accounting standard.

Worth noting is that this trading update was released on 24th August, almost a month after the close of their year end.

Growth has never been too much of an issue for Utilitywise and that’s probably the most important point to remember here.

Yes they’ve had their growing pains and this year, they’ve had to deal with them but I believe it’s a case of short term pain for long term gain. This pain has sent the share price spiralling down from 200p this time last year, to 53p today.

I’m not the only one thinking this, as you can see below, the average target price from two recent broker notes are 115p.

To add Utilitywise (UTW) to your Vox Markets Watchlist, click here and tap the, “Follow”, button.

The content of this blog (or content associated with it) is not intended as investment advice. The author holds an interest in the company mentioned. Please do your own research.

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