An attractive valuation and excellent growth prospects in a sector I like caught my attention here. Entu first floated at the end of October 2014 and has since delivered fantastic returns for those who subscribed. The question now, of course, is whether this strong performance can continue and if the company is likely to deliver meaningful returns to shareholders.
Screen Summary
- With the PE currently sat at 11.2x, PCF at 9.91x and PS at 0.73x, the company appears cheap on an earnings basis. If an investment case is to be made on these grounds, it will be important to address issues around the sustainability and growth of these earnings.
- The unusually high PB of 93.7x and ROE of 131.7% suggest something unusual. A little digging reveals that shortly before being taken public, loans were made to related parties and subsequently written off, effectively reducing equity to £nil.
- Adjusting for this simply by taking the prior year’s equity figure, we get an ROE of 72% and a PB of about 10x.
Company Background
Entu is engaged in the distribution and installation of energy efficient home improvement products. From windows and conservatories to boilers and solar panels, they offer a comprehensive range of affordable solutions across the UK. The company has grown to its current size through a series of acquisitions, with each brand acquired specialising in different areas and geographies. The strategy is to pursue organic growth while making acquisitions when favourable, with production being outsourced in order to provide flexibility and a reduced cost structure.
Financials
The company has performed excellently, with revenue almost doubling since 2011 and operating margins improving over the same period. The business does not earn particularly high operating margins but that is to be expected given the strategy of outsourcing production. In fact, when compared against many similar operations, I think the operating margins are actually quite good and the gross margins in particular are high at around 30% for the year ended October 2014. I like the high gross margins as this means, assuming operating costs are kept under control, that operating margins are likely to improve significantly as the business grows the top line.
The balance sheet appears strong in my view, although there is not much in the form of net book value, there is no debt to speak of and the position is sufficiently liquid. The low net book value was touched on…
