3 reasons to add Utilitywise #UTW to your Watchlist - Vox Markets
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3 reasons to add Utilitywise #UTW to your Watchlist

The content of this blog (or content associated with it) is not intended as investment advice. I own shares in the company featured. Please do your own research.

Utilitywise (UTW)
Share Price: 63p
Market Capitalisation: £49.46m

What Do They Do?
Utilitywise is a leading independent utility cost management consultancy, which 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 lower carbon footprint.


3 reasons to add Utilitywise #UTW to your Watchlist

1. VALUATION

Utilitywise is currently valued at £49m.

In their final results for 31st July 2016 their revenue increased by 22% to £84.4m, delivering adjusted EBITDA for the period of £18.3m and profit before tax of £18.4m.

This is a price earnings ratio of less than 3.

Often when a company is on this low a multiple, its for a reason, namely, the market has doubts whether they will achieve these earnings.

I’m prepared to put my money where my mouth is by investing in Utilitywise, at these levels, fully expecting them to achieve results of this order.

Because, if their Interim results, released on 4th April, are anything to go by then they are still achieving decent growth.

For the six months ended 31 January 2017 revenue added to their order book increased by 24% to £50.2m (H1 2016: £40.4m).

Future secured revenue increased 13% to £28.0m (H1 2016: £24.7m)

And total group customers increased by 17% to 40,855 (H1 2016: 35,064)

So why are they valued so lowly?

For a few years Utilitywise have been criticised for adopting an aggressive accounting policy that meant it’s stated income was not closely correlated to cashflow BUT this is all about to change….

 

2. THE BUSINESS HAS UNDERGONE A OVERHAUL IN TWO KEY AREAS

The Board Room

On the 9th August 2016 Utilitywise appointed Brendan Flattery as Chief Executive Officer, taking over from Geoff Thompson, founder and then current CEO of Utilitywise.

Then on the 6th December Richard Laker became the new Chief Financial Officer.

Brendan joined Utilitywise from FTSE 100 company, The Sage Group, where, as President of Europe, he was responsible for leading a 7,000-person business unit operating across 11 countries which generated annual revenues of circa £800 million from a customer base of more than two million. Former roles during his thirteen years at Sage included CEO, UK & Ireland, and Managing Director, Small Business and Mid-Market Divisions.

Accounting

Utilitywise currently recognises revenue upon the signature by a customer of a renewal contract with their existing supplier.

Renewal contract revenue typically comprises 20%-25% of group revenue, of which 10%-15% of the value of those renewal contracts typically commences in the same year that the Renewal Contracts are signed.

So the majority of these contracts do not start in the same financial year they are signed but they report the revenue from these contracts almost immediately and commissions are recorded as income well before the cash is handed over.

So on 31st July Utilitywise under the new management, will adopt the accounting standard IFRS 15 on 1 August 2017.

They state, “There is no impact on the commercial activities or cash flows of the Group, as a result of the adoption of this accounting standard. Following the changes, the Board anticipates that the Group will report EBITDA and operating cash flows that are closely aligned in future years.”

The Main changes are as follows:

– Recognition of revenue from same supplier renewals upon contract commencement rather than contract signature;

– Initial recognition value of procurement contracts (new business and Renewal Contracts) at 80% rather than 85%;

– No impact on commercial activities or cash flows but change expected to lead to close correlation between accounting earnings and operating cash flows;

– Material impact on future accounting revenue recognition and, therefore, profits;

– Utilitywise will now have an increased future order book as at 30 June 2017 of £43.3 million;

Essentially, looking at how the IFRS 15 would have effected previous years reported revenue and profit before tax, there seems to be a reduction of around 10% – 23% in both revenue and profit before tax.

I still believe this leaves the company undervalued.

Let’s say they achieve revenue of £60m for the full year, which is not a huge ask considering they reported £46.1m in their interim results (up until 31st January 2017) and announced they had a future order book, as at 30 June 2017, of £43.4m.

If we use a margin of 20% (even though it’s higher than this), profit before tax would be £12m. Put this on a P/E of 10 and the market cap should be around £120m. It’s currently £49m.

3. THE BAD NEWS IS PROBABLY ALL PRICED IN

Due to their accounting issues, Utilitywise have come unstuck a few times and it’s lead to negative sentiment that has in turn lead to selling, which we know begets more selling. It didn’t help them suspending the dividend due to the impact the accounting transition will have.

All this uncertainty has lead to their share price becoming oversold.

These problems are now, hopefully behind them. In a trading update on 31st July they stated, “The Group expects to report gross order book additions in the year ended 31 July 2017 which are c. 18% higher than in the year to 31 July 2016”

By way of comparison, for the full year to 31st July 2016 they reported, “35% growth in Enterprise UK and Ireland order book additions to £84.5m”.

We will get more clarity on Utilitywise’s situation before the end of this month, as they will report, “a further trading update in respect of the year ended 31 July 2017, including in respect of closing revenue pipeline, still to “go-live”, on 24 August 2017.”

If there’s anymore unwanted suprises then expect the share to move lower again but I’m hoping they’ve given sufficient forward guideance as to the future impact of their new accouting system and this is now priced in.

This time last year the share price was at 220p a share and it recently fell to 33.5p (it’s now at 63p) but I think we may be close a bottom and therefore a recovery.


(click to enlarge)

Technical analyst Nicola Duke recently charted them on my podcast and stated that should the share price get back to 73.77p then the next target would be, its 2016 lows, of 114p.

Coincidentally their opening price, when they initially floated on AIM, on 12th June 2012 was 64p.

Utilitywise has had a dreadful year. Their share price has fallen by 71% due to the nature of their accouting, a profit warning as a result of this new system and a major board overhaul. They have acknowleged their issues and their new CEO, CFO and COO intend to sort them out and drive the business forward.

The next few weeks should be a bumpy ride, for the share price, as Utilitywise transisitions from the old accounting system to the new one. Having said that, should Utilitywise continue to grow as they have been doing, then I’d be very surprised if, within the next 12 months, their value isn’t at least double where it is today.

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The content of this blog (or content associated with it) is not intended as investment advice. I own shares in the company featured. Please do your own research.