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Power to the people
CRITERION
Tim Boreham
March 28, 2007

WHILE elephants such as AGL and Origin Energy stomp around the energy retailing landscape, nimbler ants hope to gnaw away at their market share. The glittering prize is the Queensland retail market, which joins its deregulated southern cousins in July.
None of the listed exemplars is close to bothering the pachyderms in terms of customer take-up. But this hasn't stopped investors from eyeing Australian Power & Gas (Auspower) and Energy One - which both listed in January - as takeover targets. (Babc_ock & Brown Power, which owns 20 per cent of green power house Jackgreen, has made no secret of its interest in the sector.)
Ostensibly, the retail business is simple enough. As with telco re-sellers, the retailer buys the product wholesale (from the national electricity grid) and hires use of the wires and pipes.

The real art is in persuading customers to switch (gas is gas, innit?). In Victoria, half of the total customers have already switched suppliers since the market became contestible five years ago, while in NSW 20 per cent have moved over a four-year period.

Because sensible folk don't animatedly discuss their energy retailer around the barbecue, they need a jolly good incentive - typically a 5 to 6 per cent discount off their current bill - to bother with the paperwork.

"There's no sexy handset or a sexy coloured meter," says Auspower chief James Myatt. "Customers only swap when someone knocks on their door."

What makes Auspower's model intriguing is its link with door-to-door sales outfit Cobra Group. In an exclusive tie-up, Cobra earns an equity stake in Auspower: up to 38 per cent if it can deliver 200,000 customers.

Cobra has form in the door-knocking caper across 20 companies: it's been credited with signing up 6.5 million energy customers, while locally it is able to sign around 10,000-15,000 new punters per month.

(Cobra, incidentally, isn't listed partly because it values its privacy, which might strike householders around dinner time as somewhat ironic.)

In a Victorian pilot program over six weeks, Cobra managed to sign up 3000 customers for Auspower. On Monday night Cobra operatives started knocking on NSW doors.

Myatt describes 200,000 as a "conservative" target. Ultimately Auspower aims for a 400,000-strong business. It's not quite AGL or Origin territory, but is equal in size to Queensland utility Powerdirect.

Auspower has applied for retail licences in Queensland, where 1.6 million retail electricity customers and 150,000 gas accounts will be up for grabs. "We see ourselves getting a couple of hundred thousand of those," Myatt says.

The customer economics pan out as such: each one costs $100-$150 to acquire, but is worth $800-$1800 in future profits.

Merrill Lynch recently valued AGL customers at $930 per head, while AGL's recent takeover of Powerdirect valued the latter's customers at $1300 each.

Assuming a $1000-per-head valuation, Auspower would be worth $200 million if it attains the 200,000 target, which compares with its current market cap of $28 million. In the shorter term, Auspower projects an EBIT loss of $6.3 million for the year to June 30, 2007, improving to a $7.7 million profit in 2008-09.

We rate Auspower a SPECULATIVE BUY, partly on the strength of the Cobra tie-up, which means hundreds of sales agents roaming the streets on a given night. Some operators would be lucky to have a proprietary sales force of 50.

With the advent of a legally enforceable "do not call" register to deter telemarketers, the Cobra link becomes even more potent.

A key risk is a pricing reaction from the elephants, but this is unlikely as they cannot afford to discount across their vast customer base.

Auspower's management deserves special mention: Myatt was sales director of Energy Australia and head of TXU Australia's gas business, while two of the other top dudes hail from AGL.

In Queensland, EnergyOne has snuck under the radar already in that it services large electricity users (that is, annual power bills of more than $10,000) that are already contestible. This includes apartment blocks and shops that can be agglomerated to meet this threshold.

EnergyOne, overall, has focused on the small to mid-sized business sector, mainly in NSW and Queensland, and at last count had 8500 customers.

EnergyOne managed a first (December-half) profit of $830,000 on revenues of $14 million.

On this run rate, the company will need to re-energise itself to meet prospectus forecasts of a $1.88 million full-year profit on revenue of $36.6 million.

EnergyOne yesterday entered a self-imposed trading halt, most likely because of a pending capital raising.

EnergyOne's register is tied up with its chairman Ian Ferrier and his former Ferrier Hodgson chum, CEO Vaughan Busby. Other supporters include the ubiquitous Thorney Investments of Di_ck Pratt fame, which also features on the Auspower register.

Criterion rates EnergyOne a HOLD, at least until the trading halt is lifted on Thursday. It's probably worth buying, but we prefer Auspower.

Meanwhile, Jackgreen has discovered it's not easy being green, despite growing community interest in alternative power. Of course there's still a wide chasm between wanting to do the right thing and being willing to fork out more for green energy.

When Criterion last visited Jackgreen in December 2005, the stock was trading at 25c and the company had 10,000 customers. Back then, management targeted 25,000 by June last year and 100,000 by July this year.

Now, the stock's trading at 24c - it was double that price a year ago - and customer numbers stand at a mere 30,000.

Results wise, Jackgreen posted an interim loss of $1.5 million on revenues of $11.5 million. The loss was a quantum gain on the previous $3.32 million, but investors were underwhelmed.

Jackgreen attributed the slow customer acquisition to back office, systems and compliance issues and says it's now "significantly better placed to continue with a more aggressive growth path now that these issues have been addressed".

As with the others, Jackgreen plans to enter Queensland so we can factor in some upside there.

Brownie points, too, for Jackgreen's marketing ploy of distributing Al Gore's global warming horror movie to NSW schools. But for investors, An Inconvenient Truth is that Jackgreen needs to spring out of its box with some earnings and growth momentum.

We'll maintain a SPECULATIVE BUY - just.

http://www.theaustralian.news.com.au/story...2-23634,00.html