Energy One Limited (ASX:EOL)

An Aussie SaaS microcap, growing organically and by M&A in a niche. Strong management with high insider ownership. 82% recurring revenues, low single digit churn and low CAC.

Here is my third publicly posted writeup. My style is give you a little substack piece with a short pitch and a link to a longer writeup. This short appetizer will hopefully give you a feel for the business and you can decide whether you want to read my more detailed analysis, or not. My longer writeup, which you can read here, contains a breakdown of the following:

• Operations, company history, products

• How the business makes money

• Recurring revenues, customers & churn

• Growth plans (the M&A playbook, R&D, Macro tailwinds)

• Competition analysis (Porter’s five forces, direct product competitors, etc)

• Risks

• Moat / Competitive advantages

• Management

• Capital allocation

• Value

I hope you enjoy this one, and as always, please reach out with any feedback or comments. For me, this substack is a learning process which I am publicly documenting to remain accountable to myself and to make sure I put the work in. I’m not an analyst, so hopefully one day it can also serve as an example of a good research process and track record if I want to get deeper into equities in a professional sense. If you have any suggestions around how I can improve my process, that would be greatly appreciated.

A reminder that none of this should be considered advice or a recommendation to invest. Always DYOR.

---

EnergyOne was a struggling energy retailer in the throws of the GFC, which was restructured into a roll-up for niche software products in the energy trading space. It has purchased a number of complimentary businesses at reasonable ~5-6x EBITDA multiples over the last decade, all while compounding value-per-share, increasing margins in their acquired businesses, growing organically and increasing cash return on invested capital. The business has operational leverage as a result of its high recurring revenues (82%) and a low fixed cost base. Customer churn is in the low single digits. The Company has a 50% market share in Australia and has just expanded to the EU through M&A. EOL has diversified its revenue streams and improved EBITDA margins in their acquired businesses through operational improvements, the benefits of which may not yet have fully flowed through to the financials.

EOL operates in a highly technical oligopoly where it can enjoy high gross margins and returns on capital, along with minimal competition. Barriers to entry and switching costs deter new entrants in this particular subset of the software industry. With high insider ownership, both EOL’s management and staff have their long-term interests aligned with shareholders. Some of the company’s largest shareholders have been with the company for over a decade since its initial transformation into a SaaS business. This has produced sensible capital allocation decisions over time. Management have under promised and over delivered on M&A activity in the past with estimates, and no deal has been value destructive. Prices paid have remained overall sensible. A dividend has been paid when the Company has found no use for the excess cash it throws off. The Company is debt-free, using a blend of debt and equity to acquire businesses at attractive multiples. While debt has been preferred in the past, as the share price has appreciated, the Company has sought to use more equity to acquire businesses along with cash it has generated - a sensible capital allocation decision. The board is composed of accountants (in particular restructuring and insolvency accountants) along with technical experts, rather than a founder-CEO. 

Why does the opportunity exist? The company’s products are pretty difficult to understand, and since there are so many that have been acquired via M&A, it can be hard to wrap your head around what products they really provide. The stock also looks expensive optically on a P/E or EV/EBIT basis. The company’s market capitalisation is very small (microcap), and the trading is illiquid - the spread at times can be upward of 20c and building a position was awkward enough for an investor of my size - exiting would be even more difficult for larger investors. Also - the company does a lot of M&A and sits on the ASX, which carries a stigma as a graveyard for failed rollups. With that said, EOL is growing both organically and by M&A. The Company also has a non-founder board, which is a bit of a red flag in some circles. I don’t think the common is greatly undervalued like a few other companies I hold, but I do believe the company is overlooked and in the early innings of a growth cycle. If it is sold off harder, I will add more when I have the capital to throw down (depending on other opportunities available), but I’m not willing to risk prolonging buying completely - just in case the selloff doesn’t come. My average price is about $6 per share.

Here is some selected financial information to give you a feel for the underlying business’ performance:

Returns

Return on Invested Capital (5Y Avg): 12.3%
Return on Common Equity (5Y Avg): 12.9%
Return on Assets (5Y Avg): 6.3%
Return on Capital Employed (ROCE): 20.3%
Cash return on invested capital (CROIC): 34.4%

Margins & yield

Gross Margin (10Y Average): 33.2%
Gross Margin currently: 42%
Operating Margin: 19.1%
FCF / Div yields: 4.9% / 1%

Growth

Diluted EPS CAGR (5Y): 41.7%
Revenue CAGR (5Y): 43.2%
ROE CAGR (5Y): 13.7%
ROIC CAGR (5Y): 6.6%
Cash from operations CAGR (5Y): 45.8%

SaaS metrics

LTV/CAC (self reported): 46.3
Churn rate (sef reported): 2.5%

Naturally, value is the big question here. Here are some figures to ponder:

P/E: 44.2x
EV/EBIT: 30.6x
P/LTM Sales: 5.9x
DCF intrinsic value: ~ $8.81 (I set out assumptions in the writeup)

Seems expensive, and I flinched buying it (especially in a risky time for growth stocks), but I still think paying up for quality makes sense. The thing is only on 6x sales and it is profitable, very cash generative, no debt, growing at a respectable clip both organically and by sensibly priced M&A, and is uniquely positioned in its competitive landscape. As you’ll see in my DCF, even if market hits this thing with a multiple contraction to 20x EBITDA (down from about 30x currently) there is still a margin of safety in the price if my growth assumptions ring true and the margin doesn’t worsen. Of course, if these fundamental underlying markers of performance worsen, the multiple may contract further or impact cashflows - rendering the DCF pointless. But I think it helps illustrate that if management continue to execute as they have, the stock today will look cheap in the future.

I think to fully appreciate the competitive strength of the business and the quality of management (through capital allocation, M&A and respecting shareholders), you should read my full write-up, which is is available here.