Utilitywise UTW - the Ugly, the Bad and the Good

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THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY COS SADLY I DON‘T HAVE PERFECT ABILITY TO PREDICT THE FUTURE, AND BEAR IN MIND THAT I AM A LONG TERM INVESTOR USING MANY RISK MANAGEMENT TECHNIQUES. UTW IS A SMALL HIGH RISK COMPANY AND NOT ONE TO PUT YOUR LIFE SAVINGS IN !!
I must say it is really nice to be writing this blog. It seems that recently I have barely done any blogs specific to individual companies and it is really refreshing to have to get my Research & Analysis head on and get stuck into thinking hard about a business. 

While I am getting the number of Stocks in my ‘Trading ISA’ down to the WD40, I am being pretty strict with myself about not buying any new Stocks (despite me seeing a few opportunities that I expect to do very well) and this has meant I have been pretty inactive on the Stock buying front this year. However, I am at 42 Stocks now and with ARM being taken over and ETO looking like it might go soon, I should be down to 40 pretty soon and then I will be instigating a ‘One Out, One In’ policy and I can hopefully resume doing some in-depth and critical Research & Analysis of some interesting Stocks.

I have held UTW for years and years and know the business pretty well. It was very much in growth mode until about a year ago where it stumbled when the usual bunch of ‘Bear Raiders’ got stuck into its Accounts Policies regarding Cash Flow and since that the scepticism of many people has really held the Share Price down - this was not helped on August 8th when a Trading Update contained a Profit Warning but as usual the Short Termers have focused on the Immediate History and are completely missing the Future Potential (and the long history of achievement) which is the main reason we should be buying any Share (the History is largely in the Price, although it does help set a course for the likely Future).

My intention in this blog is to give my current view on UTW and to try and do a balanced and objective commentary on what is going on as far as I can tell - obviously we can never know what is really going on inside a Company unless we get a job there (and that usually brings its own set of biases with it). On the subject of bias, I think UTW has become one of those Stocks where the vast majority of people take the lazy, knee-jerk, way out of just quickly relying on their Kahneman ‘System 1’ Fast Thinking Brains and instantly dismiss it as an investment. I think this is a huge Cognitive Error and it is worth turning on ‘System 2’ and doing some careful, attentive, focused, unhurried, thinking and above all using the Slow Brain.

Of course, it is probably my biases screwing my judgement up with regard to UTW (but at least I am in good company as Neil Woodford now holds 27.18% of the Shares).

I topped up on UTW many, many Moons ago and I wrote a pretty detailed Blog about it - most of which still applies today and it is certainly worth reading I think. Don’t dwell too much on the numbers because of course they are pretty irrelevant now and I will look at the Valuation and stuff later in this blog. You can find the previous blog here - it will particularly help with the background around what UTW does:

http://wheeliedealer.weebly.com/blog/utilitywise-utw-buy-rationale

The Ugly
Well, there is no doubt the Ugly part of UTW is the Share Price performance in recent Months/Years - check out the Chart below:

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This goes back a couple of years and shows a very clear and Nasty Downtrend Channel (marked with my Parallel Red Lines) - we need the Price to escape this Downtrend to the upside to know that things are changing with regards to the Price Action. I guess a move above 160p would indicate that things are on the mend.

Note my Blue Horizontal Line at 112p. This is a critical level of Support and we really need it to hold - if this fails, then expect the Price to go lower (maybe down to around a Quid) but at some point the Valuation here will get Buyers interested.

The Bad

• Following the Profit Warning, it was no shock that the Brokers have downgraded their Forecasts for 2016 and 2017 - I cover these further down in the Valuation bit.
• As per the Trading Update, in the year ending 31st July 2016, 75% of Revenue came from new customers in the Enterprise Division. UTW Energy Consultants (basically the poor unfortunates who work in the Call Centre flogging UTW Services) rose from 610 to 625, an increase of 2.4%. This very much highlights the problems UTW has been having with Staff Attrition - it has been clear over many years that growing customer numbers and revenues has needed similar rates in growth of the Call Centre staff. This Staff Attrition issue was flagged in a previous Update and they are taking actions to address it - clearly there is more work to be done but I don’t see this as much of a concern. The impact to Adjusted EBITDA and Profit comes from investments in how UTW goes to market and brings in new customers - in other words, they are spending on Internet based approaches to automate customer admin and to bring in new customers cheaply and efficiently (“multi-channel”). These investments should raise Staff Productivity, drive capture of new customers and reduce Staff Attrition (presumably by making the job a bit easier).
• A chap called Steve Attwell was brought in to the company recently to run the Enterprise Division - it was just announced that he is leaving; so clearly something has not worked out here. Of course the detractors from UTW see this as a big negative but who knows what has really happened? I don’t think it will be the first time where a newcomer has not fitted in and for all we know he might have been offered something elsewhere that was very exciting for him personally. I have no idea but of course it is not good news. On the flipside, it is not the end of the world and this new Brendan chap (the new CEO) looks pretty promising. Chris Charlton is replacing Steve Attwell and he has been a UTW insider for 6 years in various roles - I suspect he is better suited to the culture !!
• I have seen much comment about Customer Review and Staff Review websites with regard to UTW and how the stuff on them is so negative. This has little bearing on my thinking - a business with 30k customers and near 700 staff is going to get some negative comments. It needs to be appreciated that these reviews are self-selecting and of course they lack balance because people only write a review if they are unhappy. In addition, UTW was part of a concerted Shorting Attack - so how do we even know the Reviews are genuine? For a degree of balance, look at these Testimonials and Case Studies on the UTW website:

https://www.utilitywise.com/testimonials/

https://www.utilitywise.com/case-studies/

• Many people say that UTW’s Business Model is unsustainable and subject to Regulatory whim. I agree to a small extent but really don’t see this as an issue and the sad reality is that we will never find the ‘Perfect’ stock and we need to accept that there are some aspects where we need to accept Risk and that is why we do Risk Management stuff like Diversification and Stoplosses. I think the Regulatory Risk is tiny because the Major Energy Suppliers are under considerable Political Pressure at the moment and it is in their interest to promote the idea that they are helping facilitate a competitive Energy Market and they don’t want the additional cost of building Sales Teams to replace the business that the likes of UTW bring in. To illustrate this further, look at the Supplier List on this link below - many of these are smaller Suppliers and it is worth noting that they are happy to use the services of UTW to get to End-Customers:

https://www.utilitywise.com/about-us/

• I don’t think it is unusual for fast growing businesses to have some hiccups along the way and it is exactly this that I am seeing at UTW in my view. You only need to think about the history of companies like Boohoo.com (BOO) and Supergroup (SGP) to see examples of how it is difficult to keep servicing a high growth rate - but I think UTW is making some serious changes to how it operates and is structured and these are being done with the Long Term in mind when it has the potential to be a business that is many, many times larger. I look at the Revenue Growth they have achieved over many years further down the blog.
• I have seen the ethics of the UTW Business Model being questioned - I am not sure what the big deal is here. OK, I wouldn’t want to work in a Call Centre (I have in the past and I worked for an Energy Company !!!) and I see no evidence that UTW is pushing customers into Energy Suppliers where it gets the best commissions - in fact, when you look at that list of Energy Suppliers which UTW deals with, it seems very unlikely that they are being devious in this way.
• Part of the Bear Raid was to raise question marks over UTW Accounting Policy with regards to Revenue Recognition and Cashflow. UTW has been doing a lot of sterling work here and renegotiating Contracts with Suppliers to pay 80% of the Revenue for a Customer Energy Agreement up front - this problem is now pretty much resolved and no issue. However, be aware that the reduction of Debt from £6.7m at the end of 2015 to just £0.2m now did include a one-off Cash Payment of £2.25m as part of a deal with a Supplier - so the Debt is not reducing as fast as it appears. Obviously though if they can get a grip of the Staff Attrition issues, then this will generate more Cash and I can see UTW soon being in a very healthy Net Cash position.
• When the recent Trading Update came out, UTW got hit hard because of the Expectations miss which was really around Earnings as Costs were higher due to the Staff Attrition issues. This had a knock-on effect of also resulting in Earnings Downgrades by Brokers for the coming years. However, it needs to be appreciated that there is a big difference between missing a Forecast and the actual achieved results - and although in the Short Term an Earnings Miss will nearly always drag on a Share Price, as a Long Term Investor, I am very interested in the Track Record of the company and the Valuation - and both of these look very attractive. I will come onto the Valuation further down the blog in its own Section, but something I want to highlight is the Revenue Growth that UTW has achieved - here is the record from ShareScope:

2011 - £10.89m
2012 - £14.69m
2013 - £25.26m
2014 - £48.95m
2015 - £69.1m
2016 - “not less than £82m”.

I haven’t worked out all the % growth figures here, but they are obviously very strong. For instance, just between 2014 and 2015 it was 41% - that is a rapid growth rate. If they meet the new Expectation of £82m, then the Growth Rate this year will be 18% (and note this is not driven by acquisitions). I think I mentioned this elsewhere in the Blog, UTW has proved in the past that it can produce Profits and Cash (which it has paid me lovely Dividends with) and with the actions they are taking to address the problems, I fully expect them to move back into Profit Growth very soon. Note, the Dividends have also grown every year since 2012 when it was 1p a Share, and this year it should be 6.2p per Share - when everything is boiled down to bare bones, the Value of any Company is really the Stream of Dividends it is expected to pay to Shareholders over time.

The Good

• I have not found the precise number (or particularly looked for to be honest, because the number is already massive anyway), but UTW appears to have well over 30,000 customers (yes, that says ‘Thirty Thousand‘, you know, 30k, that’s a lot). I have seen various comments about dissatisfied customers on Bulletin Boards and suchlike but with that number of customers I don’t think we should be surprised. In addition, having such a large (and fast growing !!) roll of customers suggests that UTW is doing something extremely well.
• Neil Woodford bought more Shares on 10th August 2016 and now holds 27.18% of the Shares. Whatever you think of Woodford (I like his approach on the quality proper companies he buys but I think he gets distracted by his obsession with frankly crappy Highly Speculative Pharma and Biotech stocks) this certainly shows a considerable level of commitment to UTW and it strikes me as very unlikely that he would keep averaging down without first checking in detail that problems are being addressed and that the underlying Business Model is sound as a pound - and remember it is not just Woody, he has a team behind him and one of them would surely raise a Red Flag if there was something truly amiss. One thing that has impressed me a lot about UTW is how they have responded to perceived deficiencies and problems - my suspicion is that Woody is very much behaving as an Activist Investor behind the scenes and this is driving the improvements. I have no proof of this, it is just a hunch. Note the Woodster bought more shares on the 11th August.
• A guy called Brendan Flattery is about to arrive as the new CEO, replacing UTW Founder (in 2006) Geoff Thompson who is moving up to Executive Chairman. Brendan is joining from Sage where he was the President of the European Business and worked there for 13 years in various roles. On paper this looks a good fit - Sage is very much a growth focused technology business and UTW is more and more heading the way of using its ‘Energy Consultancy’ software and systems to drive growth. Note also that Brendan has held and currently holds many Directorships with other technology companies - although a downside of this might be that he spends too much time on such distractions. He is aged 52 so hopefully should have a decent balance of experience and youthful energy to drive things forwards - although I am 51 and can barely drive myself to get up in the mornings. I am very pleased about this change - moving Geoff up to a Chairman role enables him to be more strategic and the young guns can drive the day to day bit of running the business. It also helps with regards to any Corporate Governance concerns - this is the sort of change that I suspect has been driven by Woody Woodford. In addition this change is part of several recent changes to the Board of Directors which give me a clear impression that the Company is being restructured to cope with future growth and they say something along these lines in the latest Trading Update when they talk about the “next phase of growth”.
• The Enterprise Division had a 21% increase in customers from 25185 in 2015 to 30552 at the Full Year (ah, I did find the customer number although I think there may be more from the Corporate Division). If you ignore the Profit and EBITDA issues for now, that is a very impressive growth rate in customers and it is worth bearing in mind that getting new customers and revenue is the hard bit for any business - get those right and it doesn’t take much tweaking to costs and structures to get Cash Profits pouring in. Most listed companies would kill for 21% growth in customers. I have also seen the reliance on new customers being questioned - I am not sure what the issue is here - many many businesses operate this way and UTW is clearly having no problems attracting new customers - the challenge is doing it in a way that is profitable but that will come (as it did in the past).
• The fledgling European Business has now moved to Breakeven - this has not been going long so it is likely that it will move into Profit soon (next year?). UTW has a very simple Business Model and it seems very likely that it is something that can be replicated across other geographies - although it is obviously dependent on how an Intermediary type business (middle man) gets paid in the different Countries - in the UK they are paid on a Commission Model from the Energy Suppliers. However, I think there could be considerable upside here if we look a few years out - this is being totally missed by the market in my view.
• The ‘smartdash’ Data Analytics software which UTW grabbed with the acquisition of t-mac is progressing to plan and they intend to rollout to all customers. These kind of Energy Usage Consultancy tools are a key differentiator for UTW and are obviously a major help in driving customer growth and retention.
• Trials of the IoT (Internet of Things) Building Automation Solutions along with their partner, Dell, are “progressing well”. They see opportunities with existing and new customers. IoT solutions of this type enable customers to have a more granular level of control of their Energy Consuming assets - such things as HVAC (Heating, Ventilation, AirCon), Security, Refrigeration, Lighting etc. This can reduce waste, bring efficiencies, give cost savings and reduce Carbon Footprint. These IoT solutions are expected to integrate and work well with the t-mac smart dash Data Analytics and will enable UTW to offer something to its SME customers (Small and Medium sized Enterprises) that was previously too expensive and only available to huge corporates. Dell are a big and credible name which will help with selling the IoT solutions and again I think this is something that the ‘Fast Thinking’ dismissive market is totally missing with regards to potential growth drivers for UTW in coming years.
• In the recent Trading Update, Geoff Thompson said this bit which I liked a lot - “Invest in the business in the new financial year ahead to drive the next phase of growth” and it is clear they are trying to create more Revenue Streams and to grow Customer numbers. All good stuff if they can pull it off - and there of course is part of the Risk but I am happy to back the Directors here and in any event the Valuation is so low that there is a considerable ‘Margin of Safety’.

Valuation
The ScreenShot below is from the ShareScope ‘Details’ screen for UTW:

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If you look in the Top Right Hand Corner you should see ‘Norm EPS(p)’ for ‘Jul 2017 Forecast’ of 19.67 (this is next year and I think that is appropriate to look at for Valuation purposes - obviously there is nothing to stop Readers running the numbers on any years shown).

With today’s Share Price of 127p, this gives a Forward P/E Ratio of 6.5 (127p divided by 19.67p) - that is exceptionally cheap for a Growth Company.

From the ScreenShot, you can see that the Expected Dividend Yield for 2017 is 5.51%. That is very nice as well.

In terms of Targets, I see no reason why UTW couldn’t be trading on a P/E Ratio of at least 15. On that basis, a Target around 300p (19.67p x 15) within the next couple of Years wouldn’t be ridiculous - and I have not really taken must notice of future Growth exceeding expectations and any Cash Pile that will most likely appear.

I hope this helps with Reader’s UTW Slow Brian thinking, 

Regards, WD.