Energy supplier Yü (YU.; 1750p) is a business that very few had heard of when SCSW first recommended it a year ago, and the energy sector continues to present other promising investment opportunities. One I have been looking at recently is Inspired Energy, the subject of this article. Based on Shore Capital’s forecast of a pretax profit of £18m and eps of 13.8p for this year, rising to £20.6m and 14.8p next, the prospective PE is just 4.6, dropping to 4.3.
Historically, Inspired has operated as a ‘middleman’ or what is known in the jargon as a third-party intermediary (TPI). Energy suppliers such as British Gas, E.ON, EDF, Yu and NPower target business customers directly through their own brand marketing. However, there is a large and active TPI sector, which acquires business customers for these suppliers and, more importantly, partners with these customers and advises them on the procurement, management, and compliance of their usage. One out of four large companies engages a TPI to procure their energy and Inspired is one of only two quoted companies servicing some of the largest and highest-quality UK businesses (the other being eEnergy, 6.8p).
During the past six years, chief executive Mark Dickinson, a veteran of the energy sector, sold a part of the business that acted as a TPI for SMEs for £10m, to leave Inspired focusing on energy procurement for large customers only, and he has also spent over £70m on buying other assurance, advisory and procurement businesses (including energy optimisation and software businesses).
Given Inspired’s interaction with large customers is often on a weekly basis once a supply contract has gone live, and with high energy prices having promoted energy to a board-level agenda item, conditions couldn’t be much better for Inspired to cross sell its range of newer energy consultancy services, which help large companies reduce their energy consumption and hence save money. It also assists with Environmental, Social and Governance (ESG) disclosures to deliver on net-zero carbon targets.
Assurance Services
Assurance Services is now what remains of Inspired’s original TPI business. 10 years ago, a TPI, especially one dealing with SMEs, was a dirty word as such firms typically operated with highly commissioned telemarketing-based sales consultants who would approach customers with deals for their gas and electricity supply. They would make their money from the margin between what they paid the energy company and what they could get away with charging customers. In its new slimmed down form, Dickinson now limits Inspired’s target market to perhaps only 40,000 estate-intensive industrial and commercial customers, most with at least 30 operating locations. They are high energy consumers and are clearly the ones most likely to want additional services.
Corporate energy contracts tend to be very different from consumer or SME agreements: marketing isn’t by telesales but on a face-to-face basis as the sale is often more technical. Contracts are typically fixed-price over three to five years and can be highly complex (based on number of locations, meters etc.). This makes procuring energy challenging (wide range of tariffs across different time periods), while the needs for auditing, reporting and usage reduction are becoming more in demand, given the regulatory drivers.
First deal was to buy SystemsLink
As a notional example, a customer such as high street retailer Boots might engage with Inspired to manage the energy supply contracts for its store portfolio. Inspired’s consultants will determine when its present contract expires and then take over the whole process from reviewing, analysing and negotiating its gas and electricity contracts all the way through to ensuring that each of the stores gets correctly switched over to the new supplier at the contract start date. Sometimes water is also added to the tender.
There is technology covering the entire process. One of the first acquisitions under Dickinson was that of SystemsLink, a software company that allowed him to streamline the process of presenting Inspired’s clients with a full range of tariff and pricing options (by months, quarters, seasons, etc.), dynamically adding their own commissions and then providing the tools they need to analyse and manage client spend. This product seems to have since been extended and enhanced beyond quoting, forecasting and budgeting through to invoice checking, forensic auditing and business intelligence reporting.
Technology-enabled services provider
I can see why he bought it. The system is a backbone to the Assurance operations, and consultants use it to find the right contracts and pricing options for their customers. Turning to the Boots example again it might have been charged a £100,000 flat fee for its Energy Assurance service and in such a case where a fee is received directly from customers, the revenue is recognized on a straight-line basis over the life of the contract. But more often than not, customers prefer the fee to be spread over the life of the contract (typically a 3 or 4 year term) and the fee gets bundled into the monthly charges from the energy company by adding it to a customer’s kWh rate - known as a “Take or Pay” setup. On such occasions, Inspired’s fees will be split over the number of anticipated units of energy consumed by each of the customer’s locations. Boots, for example, has 2,200 sites and so this process of calculating will be carried out across the entire estate. Dickinson says that 60% of its Energy Assurance fees are indirectly billed by the utility customer in this way and the keynote is that Energy Assurance revenue is only recognized when the contract goes live.
Overall, in the year to end December, the Energy Assurance business recorded only 0.9% growth in fees and commissions to £36m and made an EBITDA down from £16.2m to £15m. The EBITDA margin fell from 45% to 41% due to Dickinson scaling up headcount to improve service levels and to allow it to cross-sell its other services. “There is a flight to quality by customers going on, so we have to increase service levels, plus it enhances cross selling.”
As I am learning, Inspired’s Energy Assurance fees typically represent 2% of consumers’ energy spend but it will often deliver cost savings or cost avoidance that benefits consumers by more than five times its fees annually. This is because Inspired’s software has access to all data from its customers' water, gas and electricity meters and uses it to bundle other service into the basic service.
For instance, Dickinson says that it can now offer bill validation as a bolt-on. In fact, another of the group’s acquisitions, Ignite, has developed in-house solutions that sit on top of leading bill validation software and will gather and analyse data and identify discrepancies. “Large businesses need to audit and validate energy bills constantly to ensure they are only paying for energy that they have used. With many sites, and meters in various buildings, energy bills get complicated and errors occur. Energy companies have largely underinvested in their billing systems and 6% of energy bills have errors.”
By now, I hope it becomes apparent that Inspired isn’t just your bog standard energy provider but a technology-enabled service provider with considerable competence in dealing with unstructured data and turning it into actionable insights. With some quirky genius, Dickinson very early spotted the potential to use the data from the meters under management to do other things for the customers who it was already assisting with energy procurement: ESG disclosures and energy optimisation services.
ESG doubles its sales
These days there is a rising tide of ESG disclosure requirements that large companies have to adhere to. Exactly what is required depends on the size and type of company. An example is mandatory reporting by large companies on their UK energy usage and carbon emissions within their Directors’ Report known as Streamlined Energy & Carbon Reporting (SECR). Other regulations are TFCD and ISSB. By pulling out all the data from those meters under management, Inspired is able to provide these customers with the ESG balance sheet required to fulfil their obligations.
ESG is still small but fast-growing with sales of £2.6m in FY22 doubling to £5.5m last year, with a £1.5m EBITDA contribution. As it scales further, margins should take off.
Optimisation is big swing factor
Whilst ESG Services were developed organically, buying Ignite is what accelerated Inspired’s move into optimisation and proved to be an overwhelmingly successful deal. Inspired initially bought a 40% interest in 2019 for £5m but a year later exercised a call option to gobble up the rest for £11m. An incentivisation package with the management of Ignite was then put in place and provides a maximum additional consideration of £9.25m, or £2.3m p.a. from 2024-27. But Dickinson says the deal is going to pay for itself as Ignite has already returned >£30m cumulative profit.
Operating in Oxford, Ignite uses online site-by-site monitoring to identify energy efficiency projects and make recommendations to customers. For example, for B&Q, it might have suggested a range of changes to reduce electricity consumption such as incorporating energy-efficient LED lighting and display sensors, solar panels and the implementation of building management systems to control the store temperature throughout the days’ changing outside conditions. Initially, it might make changes to a pilot store to measure the savings and if it gets the go ahead, it will then employ a turn-key contractor and arrange installation across the entire estate. Most accounts pay Inspired on a turn-key basis, although some pay a share of savings.
Dickinson tells me that last year there were 370 customers being supported with optimisation projects, up 37% on the year before. Last year, Optimisation sales were up 13% to £54m as several customers brought forward capex spend relating to this, as high energy prices meant a shorter payback on investment but the growth is also down to the fact that improvements are an iterative process and it is often “layering” more changes to existing customer sites. This is a high-growth area and last year Energy Optimisation Services’ EBITDA increased from £10m to £15.2m, with margin up from 21% to 28% due to economies of scale.
All about maximising CLV
But looking at divisional performance in isolation perhaps misses the point that the number of clients taking services from more than one part of the group is rising and has lifted the number of clients generating >£50k income annually to 159 versus 49 in FY20. “With Nuffield Health, for example, Inspired started providing procurement services in 2018, before adding additional Assurance Services, like Bill Validation and ESG services in FY21, and then provided expanded ESG services and more Optimisation Services in FY23. Inspired has saved Nuffield > £3m on utilities.” By extrapolating the growth in lifetime value to more clients, Dickinson expects he will have been able to triple revenue and double EBITDA between 2022-27.
Software sold to other TPIs
The final bit of the mix has been to make the same SystemsLink software that runs the Assurance side available to a client base of 60 competing TPIs. SystemsLink has been bundled into a SaaS product and Inspired sells it for a minimum annual fee (for a small TPI) of around £2.5k for 50 meters and c. £10 per meter after that. Dickinson doesn't mind rivals using the product as not only is it a valuable high-quality income of £3m (+18%) with underlying EBITDA of £1.8m but it also allows him to keep tabs on rivals and look for acquisition opportunities.
I have struggled to see why investors have fallen out of love with Inspired. Despite its insalubrious early history, it’s now a very different thing. Net debt is £49m and higher interest costs (up from £3.1m to £4.5m in FY23) might have put some investors off but now that rates are falling, I am happy to put that to one side. There is also a fantastic institutional shareholder register. I am a buyer.
