Utilitywise risks priced in?

Armed with a new management team, which includes CEO Brendan Flattery and a new finance director, Utilitywise is ready to execute its next phase of growth. The energy and water broker for smaller companies has eased immediate cash concerns, paying off nearly all its debt last year and hiking its dividend to offer a 5% yield. However, it'll take more to convince the market.

Revenue jumped 22% to £84.4 million in the year ended 31 July, but investment in new technology infrastructure and slower than expected staff hiring held back earnings growth, with pre-tax profit up 7% to £17.8 million and earnings per share up just 3% at 18.5p. The negative impact of this investment won't be felt in the current financial year, chairman Geoff Thompson told us Tuesday.

High staff attrition in the Enterprise division pulled group gross margin down five percentage points. Renegotiating commercial terms with its energy suppliers has improved cash conversion - good news after last year's concerns. Still, long-term accrued receivables - income still to be collected - rose 29% to £29.6 million.

Now, 80% of the contract value goes immediately to the P&L account as soon as the contract goes live, improving the length of the cash cycle. Strong operating cash flow helped cut net debt to £0.2 million from £6.7 million. So did a one-off £10 million swing in payables and lower tax, which underpins a 30% increase in the total dividend to 6.5p. At 130p, the shares currently trade on 7 times earnings.

This performance has been driven by the SME-serving enterprise division, where revenue jumped 26% to £68.8 million and cash profit rose by a fifth to £17.1 million. The order book surged 35% to £84.5 million, and customer numbers in the UK and Ireland increased by nearly a quarter to 22,000. International clients rose by half to 6,500.

Serving larger customers on a consultative basis, revenue from the corporate division rose 7% to £15.6 million, boosted by the full-year revenue contribution from the recently acquired data analytics t-mac business.

While broker Panmure Gordon downgrades its target price by 20% to 140p, finnCap reckons there is still 70% of potential upside, valuing the shares at 222p.

"We make no major changes to our forecasts and reiterate our view that Utilitywise is at the forefront of a changing energy market, supported by investment in innovative technology," said analyst Guy Hewett at house broker finnCap.

"The current valuation is entirely focused on the short-term challenges and ignores the growth potential supported by the new services."

With adjusted pre-tax profit expected to reach £19.3 million next year on £97.7 million of revenue, the shares trade on 6.6 times forward earnings.

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