Energy Mad needs to smarten its act, IPO organiser says

Energy efficient lightbulb maker and wholesaler Energy Mad needs to smarten up its operational disciplines and will tend to suffer lumpy earnings, but is still a long term growth story despite “badly missing” its profit forecasts for its first year since listing on the NZX.

That’s the view of Woodward Partners, the boutique Wellington investment firm which organised last year’s initial public capital-raising for the Christchurch-based efficient lightbulb entrepreneur, based on earnings before tax, depreciation and amortisation of $3.5 million in the year to March 31.

Instead, the company has issued two profit downgrades in close succession, reflecting production problems at its 20 percent-owned Chinese manufacturing facility, delays getting a key product accredited in Australia, and delays in a major order.

The company now forecasts a $710,000 EBITDA loss in the current financial year, with a return to EBITDA of between $2.4 million and $7.6 million in the 2013 financial year, with a base case of forecast of $4.9 million.

Woodward uses that range to nominate a share price of 62 cents a share, compared with last trades at 56 cents a share and a listing price of $1 a share, after its initial public offering sought $10 million but had to settle for $5 million after extending the offer period last October.

“We were disappointed with Energy Mad’s two profit warnings for FY2012, but we are more optimistic about FY2013,” said Woodward’s Nick Lewis. “While we expect Energy Mad will continue to experience short-term earnings volatility, the company’s growing pipeline of business coupled with new products under development, supports our long-term bullish view.

“We believe Energy Mad remains a long-term growth story.”

However, Woodward was reluctant to attribute an earnings multiple of 6.2 times that NZX peers suggested was appropriate for a company of its type, because it had “badly missed” its forecasts.

“We are valuing Energy Mad at 5 times our weighted forecast FY2013 EBITDA. If the company does achieve its forecast EBITDA of $6.3m in FY2013, we could consider raising that multiple,” said Lewis.

However, the company needed “more disciplined operational practices”. While the issues experienced at the Chinese manufacturing facility appeared to have been addressed, Woodward said it was “surprised” the company was “not able to better anticipate the issues at the factory.”

Lewis warned also that because Energy Mad’s target customers are energy utilities or government agencies who make bulk, subsidised offers to their customers, they tend to have lengthy sales cycles.

“While such large customers offer the prospect of large, repeat volume sales, they are also cautious by nature, often making them slow-moving and indecisive in the near-term,” said Lewis in a research note.

Energy Mad would also need to give focus to competition from LED lighting, the most commonly pursued new lighting technology at present, although LED pricing remains uncompetitive and is not well-suited to the energy efficiency benefits that Energy Mad’s proprietary bulbs assist.

“We expect LED lighting to appeal primarily to speciality fashion-oriented applications for the foreseeable future,” said Lewis. “Nevertheless, Energy Mad will need to eventually respond to the potential threat of LEDs. For example, the company is already introducing compact fluorescent light products that compete directly with, and are more cost-effective than, LEDs.”

Energy Mad shares [NZX:MAD] were flat in late trading at 56 cents.