# EAX - Energy Action



## System (12 October 2011)

Energy Action Limited (EAX) is Australia's leading energy auction procurement business and a major player in the broader energy management services market.

http://www.energyaction.com.au


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## seareb (14 October 2011)

System said:


> Energy Action Limited (EAX) is Australia's leading energy auction procurement business and a major player in the broader energy management services market.
> 
> http://www.energyaction.com.au




Company listed yesterday (13/10). Closed at $1.30.


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## VSntchr (28 February 2012)

After reviewing dozens of annual reports over the last month or so...EAX is one that has taken my attention.

They state that there is a growing trend for companies to outsource energy costs. This combined with increasing energy costs and the upcoming carbon tax...leads me to think that EAX will be building their clientele.

Management reported a 15% increase in profit..but they decided not to add back a $0.5m ASX listing fee. This gives me an insight into the intentions of management and would lead one to believe they are not big on deception.
As the cost is a one-off..adding it back takes the HY profit to ~$2.2m.

Full year results could be somewhere around the 16-18c EPS region with a dividend payout around 50% of earnings.


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## Ves (14 December 2012)

Wow... almost doubled in price since I bought it. Only one post so far!

One of the best small caps on the market, in my opinion.  Predicting EPS for 2013 to be about 20-21c.  Plenty of recurring revenue (in fact it's an absolute beast in this respect).  Very high ROC at the moment as you would expect from a growing small cap.

Solid player in a niche area with favourable tailwinds and potential long-term competitive advantages.  Expect them to keep consolidating and buying out the smaller players.


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## catfish (15 December 2012)

Ves said:


> Wow... almost doubled in price since I bought it. Only one post so far!
> 
> One of the best small caps on the market, in my opinion.  Predicting EPS for 2013 to be about 20-21c.  Plenty of recurring revenue (in fact it's an absolute beast in this respect).  Very high ROC at the moment as you would expect from a growing small cap.
> 
> Solid player in a niche area with favourable tailwinds and potential long-term competitive advantages.  Expect them to keep consolidating and buying out the smaller players.




You obviously following the boat fund vesupria. I also bought eax around those levels. I bought 1500 and wish I bought more, I'm just a kid. One of those wish I'd bought more situations. I have considered adding to my position, although it is always hard to add at higher levels(human nature).

What do you think it's worth then. The market loves them and correctly so.


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## systematic (16 December 2012)

Different perspecives are always interesting:

I've got it (unsurprisingly) scoring as a trend/momentum play.

However, on a value basis, I have it on the worst score possible (i.e. expensive).
That doesn't necessarily make it a bad trade.  On a combined basis, it's still up there simply because it's been such a strong riseer.

But from a value (only) point of view, I have it as one of the worst companies I follow.


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## McLovin (17 December 2012)

I started buying this back in April and just under $2. Been a real pain trying to get my fill on such a small volume stock!

I think it's still cheap. No debt, growing cashflow, relatively fixed capex (software). Customer retention is 95%, and consists of many large corporates.

Great FCF.


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## Ves (17 December 2012)

catfish said:


> What do you think it's worth then. The market loves them and correctly so.



I think it is worth less than the current market price, but it is not crazily over-valued (yet).  Intrinsic value should increase at a pretty good clip.  As McLovin said they have lots of FCF that they can definitely re-invest at high rates of return.

McLovin - there is another similar company floating in the energy efficiency space.  The code is ECV.  The earnings look at lot more lumpy though. But looks interesting.


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## craft (17 December 2012)

McLovin said:


> I started buying this back in April and just under $2. Been a real pain trying to get my fill on such a small volume stock!
> 
> I think it's still cheap. No debt, growing cashflow, relatively fixed capex (software). Customer retention is 95%, and consists of many large corporates.
> 
> Great FCF.




I couldn't get fully set at my required price, so I'm now out - I have a hard rule on max number of positions in portfolio and couldn't justify using a position for a part holding with little likely hood of adding in the near future.

Some of these small liquidity stocks seem to be gathering large followings quickly - makes life tricky sometimes.

So I’ve sold to slum around in the unloved - crazy - probably!


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## McLovin (17 December 2012)

craft said:


> Some of these small liquidity stocks seem to be gathering large followings quickly - makes life tricky sometimes.




I noticed that too. There also seems to be a new micro-cap fund launching every week!


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## skc (17 December 2012)

McLovin said:


> I noticed that too. There also seems to be a new micro-cap fund launching every week!




Can you point me to some of these? I am looking for a lazy micro exposure.

The only one I know of is from http://microequities.com.au/


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## catfish (17 December 2012)

McLovin said:


> I noticed that too. There also seems to be a new micro-cap fund launching every week!



Next stop market efficiency


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## McLovin (17 December 2012)

skc said:


> Can you point me to some of these? I am looking for a lazy micro exposure.
> 
> The only one I know of is from http://microequities.com.au/




Sent you a PM

And also

We may as well start our own microcap fund, we seem to spend enough time discussing them!

Vespa, I had a look at ECV, but I think it's just too small, at least before the shares are out of escrow. The CEO rents a house owned by the company for $2500/month. The company will sell the house next year. It's on the books at $650k, I wonder how much they'll sell it for and to whom.


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## Ves (19 February 2013)

Results OK - but not mindblowing by any means.

Cashflow still looks pretty good and resonable top-line growth.  Cost control could be a lot better.  Have a look at salaries & admin expenses for instance.

Acquisition definitely looks like it has added some dilution to the EPS.   Hard to judge when until it has been there for a full year. 

I'm glad I got in under $2.00.  Not really paying for growth at that price - so still happy holding.


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## McLovin (19 February 2013)

I was little disappointed that they didn't even mention the rising staffing costs. They're still aiming for double digit growth, still looks good but I'll be watching the cost control very closely. Wouldn't buy at these levels but happy to hold.


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## Ves (20 August 2013)

McLovin said:


> I was little disappointed that they didn't even mention the rising staffing costs. They're still aiming for double digit growth, still looks good but I'll be watching the cost control very closely. Wouldn't buy at these levels but happy to hold.



Cost control looked heaps better to me in this half.   Still looks like a money spinner to me - amazing ROIC.  If they can keep re-investing half of the free cash flow generated by the core business for any length of time at even half of the current rate then this isn't as over-valued as it looks  (I would probably argue it's close to fair value though).

Interesting to see how hard the competition starts pursuing their excess profitability.

I still can't believe they floated this business at less than a third of the current price.  It's not as if it was a start-up or highly cyclical business.


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## McLovin (22 August 2013)

Ves said:


> Cost control looked heaps better to me in this half.   Still looks like a money spinner to me - amazing ROIC.  If they can keep re-investing half of the free cash flow generated by the core business for any length of time at even half of the current rate then this isn't as over-valued as it looks  (I would probably argue it's close to fair value though).
> 
> Interesting to see how hard the competition starts pursuing their excess profitability.
> 
> I still can't believe they floated this business at less than a third of the current price.  It's not as if it was a start-up or highly cyclical business.




A much better result this time around. I do wonder how much cash they can keep ploughing back into such a low capex type business at these sort of returns, especially if competition starts pecking at their feet. Right now, they can pretty much get 90% of their revenue without lifting a finger, an enviable position and one no doubt being eyed. I like these little money spinners. Easy for my brain to understand.


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## craft (22 August 2013)

What do you guys think of some contract acquisition costs being capitalised?

If they paid a straight salary instead of base + commission I doubt they could capitalise the employment costs.

Just an expense recognition timing issue and probably no big deal – but any unnecessary accounting complexity tends to make me go hmmm.

The forward revenue looks good, but an unknown question to me that is also relevant to the capitalisation question is how tight is the future contracted revenue especially if stress tested by an eager competitor. current returns are going to need pretty good protection I would think.

From note 14


> Discounting is applied as no claw back provisions are in place to recover commission paid should the
> employee leave or the energy supply/monitoring contract terminate before the end of the original energy
> supply/monitoring contract term.


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## Ves (22 August 2013)

craft said:


> What do you guys think of some contract acquisition costs being capitalised?
> 
> If they paid a straight salary instead of base + commission I doubt they could capitalise the employment costs.
> 
> Just an expense recognition timing issue and probably no big deal – but any unnecessary accounting complexity tends to make me go hmmm.




I think it is OK - as long as they match income and expenses closely going forward.  I try to make monitoring cash flow a priority and operating cashflow conversion to EBITDA -  so would like to think it would become obvious if they were manipulating it.



> The forward revenue looks good, but an unknown question to me that is also relevant to the capitalisation question is how tight is the future contracted revenue especially if stress tested by an eager competitor. current returns are going to need pretty good protection I would think.



I think you make a good point  and  my biggest problem, and why I haven't looked at buying any more since $2 is that futures returns and ability to protect the franchise are still fairly unpredictable at this stage.


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## McLovin (23 August 2013)

craft said:


> What do you guys think of some contract acquisition costs being capitalised?
> 
> If they paid a straight salary instead of base + commission I doubt they could capitalise the employment costs.
> 
> Just an expense recognition timing issue and probably no big deal – but any unnecessary accounting complexity tends to make me go hmmm.




Hey craft

I'm willing to give these guys a pass. IMO, they are capitalising an expenditure that can be traced directly to a discrete revenue stream, instead of just apportioning some marketing spend or sales team expense to "customer acquisition" ala JIN. Like V, I like the cashflow statement more than the P&L.



craft said:


> The forward revenue looks good, but an unknown question to me that is also relevant to the capitalisation question is how tight is the future contracted revenue especially if stress tested by an eager competitor. current returns are going to need pretty good protection I would think.
> 
> From note 14




This is a fair point. I think the current contract revenue is fairly safe given the size of both contracting parties (energy suppliers and mid/large size energy users) but after that who knows. FWIW, I don't think these guys have the type of network effect that genuine "online markets" do like REA, CRZ etc this is much more of a niche business but so far they have managed to carve out a nice little earner. This isn't one I'd toss in the bottom draw for 10 years, I'll be watching it.


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## craft (23 August 2013)

McLovin said:


> Hey craft
> 
> I'm willing to give these guys a pass. IMO, they are capitalising an expenditure that can be traced directly to a discrete revenue stream, instead of just apportioning some marketing spend or sales team expense to "customer acquisition" ala JIN. Like V, I like the cashflow statement more than the P&L.




I get the matching of expenses to revenues argument but....

I’m still having trouble with this.

To me wages are an expense when incurred and if you look at the deferred tax liabilities the tax office (hard task master)  also treats them as a current expense. 

There is no potential to claw back the wages if things don’t turn out as planned – so why put them on the balance sheet effectively as a pre-payment.

If the commissions weren’t capitalised but just run through as normal wage expenses (treated as  the tax office treats it) then reported earnings would not have been +21% but – 15%. Not immaterial.

Perhaps the accounting treatment was to massage the headline number otherwise impacted by the change from trailing to upfront commission.

What was the pressure to swap from trailing commission which matched the employee rewards to the revenue timing for the company? 

Obviously I’m with you on liking the cashflow statements – which brings me to another slight yuk in the EAX report.  Note 20 the reconciliation from cash flow to profit isn’t as informative as it could be.

I agree my nitpicking here doesn’t necessarily change the whole investment thesis (have held) but Hmmmm all the same for me.  Why should owners have to read between the lines to get the full picture.


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## McLovin (23 August 2013)

craft said:


> I get the matching of expenses to revenues argument but....
> 
> I’m still having trouble with this.
> 
> ...




I've never seen a power contract before but I assume that you just can't walk away from them, without some stiff penalties. So, as I said, it seems unlikely that they will have a lot of contract loss before the end of the amortising period. It's an area with a lot of grey in the middle. I guess you have to make a line call on whether you're comfortable with the accounting treatment or not, to me it doesn't seem like a red flag, although I'd be inclined to adjust the earnings in my workings in the future to try and see through it.

Can I ask you the question in reverse, when do you think it's appropriate to capitalise acquisition costs?



			
				craft said:
			
		

> If the commissions weren’t capitalised but just run through as normal wage expenses (treated as  the tax office treats it) then reported earnings would not have been +21% but – 15%. Not immaterial.




Sure, but there would be a fair bit of one offiness to this year's profit number if they had expensed all current contracts in this period.



			
				craft said:
			
		

> What was the pressure to swap from trailing commission which matched the employee rewards to the revenue timing for the company?




This is an interesting question, perhaps the employees no that the secret ingredient is just cough medicine and they could easily replicate it?


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## craft (24 August 2013)

McLovin said:


> I've never seen a power contract before but I assume that you just can't walk away from them, without some stiff penalties. So, as I said, it seems unlikely that they will have a lot of contract loss before the end of the amortising period.




Nearly 90% of the contracted revenue is for their own activ8 energy efficiency business, not with third party energy retailers via the energy exchange business.  I’m guessing but I suspect the active8 contracts are pretty loose if a customer wants out early.



McLovin said:


> It's an area with a lot of grey in the middle. I guess you have to make a line call on whether you're comfortable with the accounting treatment or not, to me it doesn't seem like a red flag, although I'd be inclined to adjust the earnings in my workings in the future to try and see through it.




Yep its grey – that’s why how it’s handled is so illuminating.



McLovin said:


> Can I ask you the question in reverse, when do you think it's appropriate to capitalise acquisition costs?




When costs incurred are above and beyond business as normal.   Eax is just conducting business as normal as far as I’m concerned.   Lots of companies sell their services under contracts with duration longer than 1 year most don’t capitalise employment expenses.  



McLovin said:


> Sure, but there would be a fair bit of one offiness to this year's profit number if they had expensed all current contracts in this period.





How much one offiness? There’s no way I can judge realistic wage costs in the last half due to the accounting treatment.  It would have been just so much cleaner to take the commission payment straight to the P&L and commented that ‘X’ amount of the lower profit was due to the change of employment arrangements.

In trying to work out the wage expense for the half I don’t like the 1.7 million commission payment  being called one off as I’m sure some of this would have otherwise fallen into this period.  Whilst being on things I don’t like about the cash flow – I don’t like the “strong operating cash flow up 27% statement” firstly because of calling the whole 1.7 one off and also if note 20 was more transparent it would be a lot more obvious that working capital ‘noise’ flatters this year’s cash flow by 2 million+ compared to last years.  All up operating cash flow looks weaker to me plus I can’t work out what’s really happening with wages their major expense and it didn't look that good last half when It was more transparent.

Nothing I’ve raised is a definitive red flag and could easily be overlooked if you have confidence in management.  but for me  - In summing up, it's the Constitution, it's Mabo, it's justice, it's law, it's the vibe and ”” *No, that's it. It's the vibe*




McLovin said:


> This is an interesting question, perhaps the employees no that the secret ingredient is just cough medicine and they could easily replicate it?




Hmmmmm

ps

Just playing devils advocate, wouldn't have bothered looking into the reports if the company didn't have some appeal - have a good weekend.


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## Ves (24 August 2013)

Craft -  still thinking about this,  certainly not ignoring you.

But would like to say that the more I think about it,   the less the $1.7 million "one-off" payment makes sense.    It would be helpful if the company gave some more explanation on this matter and what it means in a "normalised sense."  

It should seem that since commissions are now paid _in full upfront_, rather than on a _trailing periodical basis_ that short-term cash flow will always suffer and their internal leverage and returns on capital will be reduced.

The rest of it is a can of worms in terms of what this means for the quality and stickiness of their client base and the competitive moat around their business.   I think the only the answer can only be truly revealed by the passing of time and diligent monitoring of the situation by investors.

Very thought provoking -  I did notice the numbers in my assessment of the annual report,   but the issues surrounding them did not snowball into anything as in-depth as this.   Gotta keep training that inverted thinking mechanism in my brain.  

PS: I still need to listen to the audio presentation on BRR media.   Not sure if McLovin or yourself have tried listening to it.

http://www.brrmedia.com/event/11468...r-nathan-cain-francis-chief-financial-officer


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## craft (25 August 2013)

Ves said:


> Gotta keep training that inverted thinking mechanism in my brain.




Be patient. Get bitten on the **** enough times by managers that prefer to show you only the blossom but not the thorns and it comes naturally soon enough.  On the flip side you have to be careful not to turn a mole hill into a mountain.

Slowness of information is an oft used argument against fundamental investing – we are supposed to be the last to know – but there are normally plenty of early warning signs if you scratch around.

You got set early, you have gained some altitude, and I’d dare say you have some more insight then those just looking at the headline number or the jump in the share price. That’s a good place to be, allows  you to be alert but not alarmed.  Sometimes Mole Hills are just Mole Hills.


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## Ves (21 November 2014)

Hey McLovin, you still following this one?  

The market was really upset by the last result.... but looks like selling is picking up again two months or more later.

Been a lot in the media about federal governments and energy etc.   and when you add the company's troubles with acquisition integration and suffering margins / contract renewals in their most profitable segment it doesn't look as rosy.

Any insight?


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## McLovin (21 November 2014)

Ves said:


> Hey McLovin, you still following this one?
> 
> The market was really upset by the last result.... but looks like selling is picking up again two months or more later.
> 
> ...




Hey Ves

Nope, I got out of this when it was still above $3. There was no single reason it was more just a lot of small things that in the end put me off. You still in?


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## Ves (21 November 2014)

McLovin said:


> Hey Ves
> 
> Nope, I got out of this when it was still above $3. There was no single reason it was more just a lot of small things that in the end put me off. You still in?




Yep,  tempted to add a few more.   Didn't really get as many as I wanted the first time it was around $2.    Will look at it closely.   I doubt it's going any where before March results (market has fallen out of love,  hotcopper has dried up...)


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## McLovin (21 November 2014)

Ves said:


> Yep,  tempted to add a few more.   Didn't really get as many as I wanted the first time it was around $2.    Will look at it closely.   I doubt it's going any where before March results (market has fallen out of love,  hotcopper has dried up...)




I haven't kept up with them since I sold. Let me have a read up and see where there at.


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## skc (21 November 2014)

Ves said:


> Any insight?




I spent a bit of time on this a few months back and decided it wasn't a stock worth investing at this time.

What appeared attractive in the first place was the reverse auction platform (or the AEX business)... but that business appears to be heading in the wrong direction. Every metric on page 15 of the half year presentation were worse off. The "energy sites" on the platform are becoming smaller, which means more sales staff at lower margins. Also, 77% of customers are due for renewal in the next 18 months... they call it the "renewal cliff opportunity" and I think it should be perceived as a major risk. How much lower can prices get by going through AEX again? I couldn't find any historical indication on renewal success rates...

The Activ8 feeds from the AEX business so it bears much the same risks.

The "PAS" business is just run of the mill stuff which is low margin busy work without little competitive advantage.

So all in all it doesn't fill me with confidence that the company in on track for growth.


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## Ves (21 November 2014)

Hi skc,

Good points on the renewal cliff.

As far as I remember the big high margin bucks is in the contracting business Activ8  (which performed poorly in 2014).   It may be a lot lumpier than it seems.

Without looking any further,  perhaps the recurring revenue "buzz" that they used to sell to investors is a bit misleading. Off the top of my head it has more to do with the contract monitoring & bill management side of things & there's also some spill-off from the reverse auction model.   

What I'm getting at.... the profit split seems to be more geared towards the high margin activ8,  rather than the segments with recurring revenue which are lower margin.

The newer acquisitions also looked a bit more working capital heavy too,  hence lower dividend  (but higher EPS which suits the remuneration hurdles ).

The price I paid I can justify ($1.80)   but anything near $3-4 was far riskier for me so never added.


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## shouldaindex (8 December 2014)

On the watchlist.  

Needs $2m H1 earnings in Feb to make things interesting, or else I think it's got flaws in it's business proposition (as mentioned above).


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## Ves (11 February 2015)

I'm out.   The best parts of their business aren't making as much money any more.

edit:  I also lost faith / trust in their management team,  they seem to have more excuses than solutions  (ie.  "it will be better by next half").


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## McLovin (13 February 2015)

Ves said:


> I'm out.   The best parts of their business aren't making as much money any more.
> 
> edit:  I also lost faith / trust in their management team,  they seem to have more excuses than solutions  (ie.  "it will be better by next half").




You reckon the lack of profitability has something to do with this? Which is also why they changed the way they were remunerated because if they left that was it?



McLovin said:


> This is an interesting question, perhaps the employees no that the secret ingredient is just cough medicine and they could easily replicate it?




I agree about managment. Perpetually promising big things.


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## Ves (13 February 2015)

McLovin said:


> You reckon the lack of profitability has something to do with this? Which is also why they changed the way they were remunerated because if they left that was it?



It probably explains some of the erosion in their excess returns,  but I also think the higher margin segments are much more volatile / lumpy,   or even cyclical perhaps,   than they first looked when it listed.  The talk of "delayed contracts"  seems to support this theory too.  Perhaps their client base isn't as big as it looked and makes it harder for them to ride through these delays without earnings before materially affected.

My view is they have made acquisitions  (low margin,  high working capital businesses)  and cash flow has stayed the same.   They have taken a hit else where.  Some did argue the "increased EPS" they advertised was linked to management remuneration incentives,  rather than growing actual free cash flow  (which it doesn't if you need more working capital).


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## McLovin (12 May 2015)

In Feb they gave guidance of $4.2m-$4.8m. Today it's been revised down to $2.6m-$3.0m. They're not getting much spark out of the much touted renewal cliff and they've also discovered some metering irregularities.


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