Nanocap 7 Final Distribution

Energy Action Ltd (ASX:EAX), the business owned by your Nanocap Trust No 7 investment, released financial results for the 1st half of FY20. The results were underwhelming and disappointing.

1H20 Financial Performance

The company reported a 23% decline in revenue to $10.4m versus the previous corresponding period (pcp), EBITDA of $550k, and an underlying net loss of $150k.

EAX’s core procurement division experienced a 17% decline in revenue to $3.13m due to lower auction volumes on the back of poor renewal opportunities, primarily from very poor client retention in the previous year. The company is working to address this by encouraging clients to go to an energy procurement event well ahead of their expiry, such as bringing forward December auctions to June.

In EAX’s Contract Management and Environmental Reporting division, (CMER) revenue declined by 16% to $6.22m. Again, this is due to poor retention of clients in prior years and long-term contracts not being renewed. On the positive side, EAX did experience its strongest bookings of sales of Metrics in 2 years, but those sales will not convert to revenue for some time. EAX has also had great progress with embedded networks, winning the project management and billing for Sydney Trains Embedded Network covering 303 sites, primarily stations, over a 3-year period. Although this is not a material contributor to earnings it does validate their product offering.

The company’s project management and advisory business (PAS) also saw revenue decline 56% to $1.07m. This was due to the company discontinuing unprofitable business lines. There were some improvements in the division due to advisory work in relation to solar projects.

Balance Sheet and Dividends

EAX breached its Gearing Ratio covenant due to a decline in earnings at December 2019. The company has since received a waiver from the Commonwealth Bank.

EAX’s financial position has slightly improved with net debt reduced to $4.6m from $4.96m in HY19. The company has suspended interim dividends as it seeks to continue reduce net financial debt and further invest for growth.

Investment Opinion

These are poor operating results and contrast with the business performance at the end of FY18. As investment managers of Nanocap 7 and co-investors in the vehicle, we are clearly disappointed with these results. It is painful to produce a loss outcome for our investors. In any investment we undertake, we are subject to fundamental risks. Sometimes those risks never materialise, other times one or a combination of those risks crystallise and impair the fundamental value of the business. Thematically and fundamentally EAX was a solid business with a significant growth pathway. In order to capture a growth pathway, a business requires successful execution by its management and its employees. There has been significant execution underperformance by the company. The investment has been an unfortunate one and one in which we have sunk significant resources in trying to steer the business to a better outcome. We put in place a Non-executive director, advocated for changes to senior management (which were eventually heard and acted upon), provided unremunerated counsel, client leads and commercial and strategic advice. In 2018 the business was almost sold to a large multinational that would have resulted in a profitable outcome for all SPV investors. The deal failed to consummate, and Energy Action’s business took a negative turn. The result is a bruised organisation that will require significant improvement to turn it around.  We note that the business continues to trade profitably and may be able to find an eventual suitor.

Final Distribution and redemption of Units

Given we have reached the 4-year milestone and the strategic review did not conclude in a trade buyer making an acceptable bid for the business, we have decided to sell all the shares in EAX held by the SPV. We have today made a final distribution to investors of approximately 12.3c per Unit and have redeemed all Units held by each investor.

Distribution and redemption statements should be available in your investor portal now and a Tax Statement will be available in late July following the conclusion of the financial year.

If you have further questions regarding your Nanocap 7 investment or any other Microequities investment matter, please call us on 02 9009 2900.