The acquisition of a rival business could have a more positive effect on energy consultant Utilitywise’s (UTW) earnings than forecast by consensus. Analysts are taking a cautious approach with the newly acquired EIC after the steady drop in earnings it has suffered over the past three years. Yet we believe there is good reason to suggest these estimates may ultimately prove to be too conservative.

Utilitywise last week (13 Jun) announced plans to buy EIC for £15.5 million to boost its capabilities in risk management products and serving customers who want more flexibility when they buy energy. The purchase price equates to a 6.7 times historic EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation). This is much lower than the 9.1 to 15.8 times multiples seen for other takeovers in the sector.

The reason why the £64 million cap managed to secure EIC for the lower valuation is a slide in EBITDA from £3.3 million in 2011 to £2.6 million in 2013. Chief executive officer Geoff Thompson says the company was restrained by a lack of business development staff, even though it boasts very high levels of customer renewals and lofty profit margins.

Utilitywise has invested in more sales staff (see Shares, Small Caps, 25 Apr) to accelerate earnings growth. It therefore already has large business development resources with which it can address EIC’s shortfall in marketing activity. ‘EIC have a database of 5,000 prospects which they regard as the total prospect universe,’ reveals Thompson. ‘We think the market actually has between 80,000 and 90,000 prospects.’

Shares says: Utilitywise is fully aware of the importance of marketing and its increased capabilities bode well for reviving EIC’s sales growth. Buy at 104.5p

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