Good Energy’s unique equity proposition is its combination of renewable generation capacity with a growing retail energy business. All energy sold to customers is sourced from renewable sources, with approximately 19% generated by its own solar and wind farms and the remainder procured via long-term contracts from third-party renewable generators. The stock is attractively valued in comparison to its forecast high level of growth.
Good Energy increased its EBITDA in FY16 by 39% from £7.3m to £10.1m. Operating highlights included increasing its electricity customer numbers by 5% to 71,486 and its gas customer base by 14% to 44,107. Furthermore, the company sold the 5MW Oaklands solar site for £5.8m, which will further improve the net debt position, already decreased to £52.2m from £54.0m in FY16.
Good Energy continued its strong track record of growing EBITDA and customer numbers. On a standalone basis, the earnings story is attractive and reasonably priced. However, we believe there is long-term value in the customer base. Good Energy’s customers pay a premium on their power bills due to the 100% renewable guarantee. 2017 will see the completion of the new customer information and billing system, providing a platform to launch further new product offerings. We note that, at group level, gross margins have been more than 30% for two years
As renewable generation and supply activities expand, Good Energy is expected to grow its consensus EBITDA, from £10.1m in FY16 to £10.7m in FY17 and £12.1m in FY18. Given 39% growth in FY16 and with gas and electricity customers continuing to grow, this growth trajectory seems realistic. Consensus suggests growth in adjusted FY17e EPS of 13.6%, increasing to 50% in FY18. Dividend growth is expected to be 3.0% in FY17 and 8.8% in FY18.
The FY18e price earnings to growth (PEG) ratio of 0.33x is very low. The FY18e P/E of 16.2x is in line with the broader utility sector. The stock has the benefit of long-term power price subsidies on its renewable fleet plus a sticky customer base, which cares about sustainable energy procurement. Good Energy therefore has an attractive combination of downside earnings protection and future growth, against which the current valuation looks consistent.