Market failing to value growth
Utilitywise Plc (LONDON:UTW) is trading at a discount to the broader market despite offering superior growth. While uncertainty could persist until the finalization of the regulatory regime later this year, we believe that Utilitywise’s internal controls place it in a strong position to deal with regulatory changes and provide it with a competitive advantage over smaller market players. Meanwhile the share price appears to be discounting significant risk. We leave our estimates largely unchanged.
Expansion plans remain on track
The recent trading update confirmed that Utilitywise is performing in line with management’s expectations and that it remains on schedule to report a significant increase in both revenue and profits for FY15. Having completed the move to its new offices we believe Utilitywise’s expansion plan for FY16 is on track. However, concerns over the company's growth rate following a reduction in pipeline revenues, the lag in the receipt of cash relative to earnings, a weaker oil price and regulatory concerns may contributed to recent share price weakness. While regulatory uncertainty is likely to continue until the code of practice is finalized in Q415, Utilitywise has been in discussions with Ofgem regarding the code and has developed in-house sales and service protocols that have resulted in high levels of customer satisfaction (measured by customer advocacy) and retention. Historical precedent suggests that a lower oil price will do little to slow Utilitywise’s growth.
Cash generation despite lag to earnings
Utilitywise is working with its suppliers to reduce the disparity between reported earnings and cash flow, and now claims that it receives over 75% of the cash on c 74% contracts signed with suppliers on or before the ‘go-live’ date. However, in H1 Utilitywise took advantage of long-term contract offers from suppliers to lock-in advantageous deals for existing customers. Revenues from contract extensions are recognised as they are secured, reducing the revenue pipeline but securing revenue, profit and cash flow over the longer term.
Valuation: Shares trade at a significant discount
Despite superior growth prospects, Utilitywise trades on a discount to the market. Utilitywise trades on a PEG multiple approximately half that of the All-Share. Placing Utilitywise on the same PEG as the All-Share generates a share price of 435p. Alternatively, calendarized earnings for 2016 would have to be reduced by over 20% in order to equalize the PEG ratio with that of the market.