@dunjo ,
At the outset, the thing that needs stressing is that it is not for lack of performance that LPE has become so maligned by the market.
Objectively, the company has achieved impressive Revenue results (Cash Receipts have more than quintupled between FY2017 and today ...from $10.3m to the current ~$55m run rate).
Rather, the problem for LPE is that it's managers set, and publicly-articulated, targets that proved far too high.
So, it's really a case of delivering quite well, but not as spectacular as the market's expectation was set.
As a business model, it is relatively straight-forward: essentially, poach custom from the large energy market players (notably the out-of-state Alinta and the bureaucratic and sleepy Queensland government-owned Ergon Energy) by offering a simplified, cost-effective service offering to a specific market sector (viz. strata communities).
But as simple a business it is, at the same time it is also a difficult one to value with any degree of accuracy.
(Because of LPE's capital structure and the fact that it does not presently generate surplus capital, I believe the most relevant way to assess the financial performance of the business is by analysis not of its P&L, but of its cash flows - so that's where I will focus my comments.)
As can be seen, from the Abridged Cash Flow Statements (which I've simply re-cast from the Appendix 4C statements) over the company's listed life, its growth in both customer numbers and Cash Receipts have been matched by an increase in its cash operating and investment costs, as the company has sought to reach the point of scale efficiency (aka, the necessary "investing ahead of the curve" which drives revenue growth):
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(Note: Trading Profit I've defined simply as Cash Receipts less Product Manufacturing and Operating Expenses. The Trading Margin compression experienced in FY2020 warrants comment: that occurred primarily because of the significant up-front expenditure related to Shared Solar (with sales from this new customer segment delayed into CY2021), as well as the impact of Covid during the year. I think it is fair to say that 16% Trading Margin is far from normalised. As will be seen later,
I have used 20% for my prospective estimates, a figure which looks conservative in the context of LPE's history, excluding the most unusual FY2020 year.)
Of course, that significant growth has resulted in a total of $20m negative Free Cash Flow over the 5-year review period, which has needed to be funded externally - $9m of it from equity and $15m from debt. (Note: company currently has some $7m in Net Debt).
The question is: When will the business be at a point of self-sustaining commercialisation?
At the current level of customer numbers (~36,000) I estimate the company still to be consuming capital (See "Current" column below)
However, at 40,000 customers (the "JH21" column), which is where they aim to be by the end of FY2021 (we'll see - they have a habit of over-promising), that's when they stop losing cash. This assumes only a modest increase in the Cost of Doing Business (Marketing & Advertising, Staff Expenses, Admin & Corporate Costs) which, by all accounts, is not an unreasonable assumption.
For further context - and this is why I have been buying shares in the company - once the company reaches a point of decent scale (say, 60,000 customers... a quite conceivable target), the Free Cash Flow would be several millions of dollars (Refer "At Scale" scenario).
And, considering the "Blue Sky" possibility of say, 100,000 customers (aspirational target, but not totally out of the realms of possibility), in that case (and even allowing for a 50% increase in CoDB), the Free Cash Flow that would be generated each year would be of a similar order of magnitude to the market value of the company today!
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Its been a tortuous journey, filled with boardroom dramas, global pandemics, questionable funding strategies, poor equity market engagement and expectation management; and just about every other thing that might befall a company.
Yet this fledgling little business has continued to grow its customer base and its embedded revenue streams, while at the same time continued to invest heavily in new growth avenues.
If this was a privately-owned business, I'd say its owner(s) would actually be quite content with the traction it has demonstrated over the past few years. They certainly would not have any reason to feel that their business is today worth 85% less than it was worth four years ago, when it started its journey.
But because its performance is in the full glare of the public, that's effectively what the market has concluded.
Of course, maybe the $1.65 valuation when the company was first listed in its current form might have overvalued the business to begin with, but I'm thinking that a business generating around $50m in Revenue, and $10m in Gross Profit equivalent, must certainly be worth a great deal more than the $22m Enterprise Value currently being ascribed to LPE.
Put another way, in the hands of a corporate owner - which would immediately be able to rip maybe $5m of duplicated fixed overheads out of the company- the company would today be generating Free Cash Flow of some $5m.
Applying a 10x multiple to that $5m of FCF (and 10x is conservative, I'd argue, given those cash flows are high in quality, being durable and predictable), yields a $50m Enterprise Value, or a $43m Equity Value.
That's the equivalent of ~$0.68 per share.
And that's without that corporate acquirer paying anything for the optionality around growth.
That's the end game here, I feel: Either LPE starts to demonstrate some Free Cash Flow generation soon, or some corporate acquirer is going to come along, give current management the heave-ho, and make the Free Cash Flow happen.
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