carbon tax, page-4

Energy Action Ltd (EAX.ASX; $2.71/sh; Mkt Cap $69m) – Profitable growth stock to own going into the result. BUY PT $4.55/sh.

•We see no reason for the recent price weakness on low volume leading into the FY13 result and reiterate our BUY recommendation and 12mth PT of $4.55/sh providing 68% upside.

•Management reiterated on a recent road show the company has continued to experience strong growth in auctions for energy contracts and corresponding contracts for the Active8 reporting and contract management service in FY13, as well as growth in the Active8+ and Ward Consulting divisions.

•History of strong performance. Management have a history of strong financial performance since inception with revenue growth of ~25% year on year, EBITDA margins of ~20% and ~23% EPS growth over the past 3 years and we see no reason a similar result will not come through in FY13.

•Strong cash generator, dividends and no debt. EAX operates a highly profitable business model with strong recurring revenues and operating cash flows, no debt and a track record of reliably paying a fully franked dividend. The company provides a 50% payout ratio, representing a yield of 2.8% and 3.6% in FY13 and FY14 based on our EPS forecast of 20.4c and 23.6c respectively.

•Upcoming election should deliver clarity on carbon pricing. We view the upcoming election will deliver greater certainty surrounding the carbon tax impost on the energy retailers. Greater certainty on carbon tax is a positive catalyst for EAX to extend average contract terms for the energy auction platform service (AEX) which have come down from a historical average of 30mths to 23mths. Management have also highlighted the success of a new ‘Carbon Exclusive’ auction product. In only a few months this product has resulted in a material lift in contracted sites pushing into and beyond 2015 and providing a floor on the average contract term.

•Scalable operations in place to support revenue and profit growth expectations. With an estimated market of 80,000 businesses, EAX’s current market penetration of 5% supports our revenue growth expectations of at least 20% pa in the coming years without very little requirement for capital investment or expansion in current staff and operations.

•Our enterprise valuation for EAX is $107m, or $4.24/sh. Based on our conceptual model EAX trades at a PER of 17x and 13x based on FY13 and FY14. While this represents a premium the ASX All Industrials we view the growth profile, zero debt, high cash generation, visibility of forward earnings and operational leverage on the existing cost base supports a higher PER.

•BUY, PT $4.55/sh, 68% upside

http://www.fostock.com.au/announcements/energy-action-ltd-eax-asx