Utilitywise’s (UTW) trading update states the business is progressing in line with management expectations and indicates that the company remains on track for FY16. Encouragingly, the proportion of extensions business is said to be declining. A continuation of the reduction in the proportion of contract extensions in H2 would have a beneficial impact on cash flow and, in our view, market perception of the business. Potential upside remains.
UTW’s trading update states that for the six months to the end of January the business performed in line with management expectations. UTW highlighted revenue growth in the UK and European operations, year-on-year growth in customer numbers (29,228 vs 22,048, 31 January 2015) and an expansion of the revenue pipeline (£24.7m vs £23.5m, 31 January 2015), although the pipeline showed a small decline vs the year-end figure of £26.2m. Consultant headcount reached 625 (449 at 31 January 2015) and net debt stood at £10.4m. The CEO, Geoff Thompson, said the company continues to make progress in negotiating new commercial terms with suppliers and, significantly, that “the rate of new customer acquisition has increased compared to extensions and renewals”.
We have made some fine-tuning adjustments to our projections for FY16 and FY17 but, based on the trading update, we are not minded to make significant alterations. Our forecasts include 36% expected revenue growth and an increase in consultant headcount to 743, which will require a challenging (although not unprecedented given the addition of 247 consultants in FY15) pick up in H2. Importantly for cash flow, we assume a decline in the proportion of the extension business to 30% for FY16 and 25% for FY17 compared to 40% in FY15. Our FY16 projection for net debt (£5.0m) remains sensitive to the proportion of renewals business achieved.
We continue to examine short- and long-term approaches to provide a valuation framework for UTW. Short-term approaches such as PEG and peer multiple analysis produce an average valuation of 216p per share, while longer-term methods (transaction/DCF) produce a higher valuation of 293p. Averaging the two approaches suggests a valuation of 255p. Excluding the DCF from the calculation yields an average valuation of 232p/share.