Is Good Energy a good stock to buy now?

Until recently, I hadn’t really heard much about energy business Good Energy (LON:GOOD), even though it’s been listed on the AIM market since 2012.

But Good Energy is currently sitting near the top of the StockRanks and keeps appearing in my screen results. It recently showed up in some of Ed’s multibagger screens, too.

Good Energy has also put in a notable share price performance recently, doubling since the end of September:

I’m keen to learn more about the story here and find out whether I should start paying more attention to this business.

100% renewable, no greenwash!

Good Energy was founded by Juliet Davenport in 1999 as a green energy supplier. To this end, the company acquired some renewable generating assets of its own, including the Delabole Wind Farm in Cornwall and a number of solar farms.

Good Energy was also instrumental in developing the concept of feed-in tariffs, which pay customers for the electricity they generate. The company has remained one of the market leaders in this area, even after the government’s original Feed-in-Tariff system ended.

This focus on decentralised generation has allowed Good Energy to build up a loyal army of more than 2,000 small-scale generators. These help to supply the company with its renewable electricity needs. Interestingly, the company says that more of its customers now generate their own power than buy it from Good Energy.

However, the profile of the business has changed dramatically over the last couple of years. Although the focus on decentralised generation remains, in 2022, Good Energy sold its own 47.5MWh renewable power portfolio to Bluefield Solar Income Fund (LON:BSIF).

To maintain its ability to guarantee to provide renewable electricity, the company has signed direct power purchase agreements (PPAs) with large renewable generators such as offshore wind operator Ørsted.

While many large corporations now use PPAs, this is apparently an unusual approach for a UK energy supplier. Most buy electricity from the wholesale market (including fossil fuel electricity) and then offset these emissions by buying renewable certificates (REGOs).

Good Energy has campaigned against this “greenwashing” and claims that these certificates are often double-counting renewable energy that has already been consumed elsewhere.

Current operations: from supplier to service provider

The sale of Good Energy’s generating portfolio attracted the ire of its largest shareholder, rival supplier Ecotricity.

The two companies appear to have been locked in a running battle for a while now. This has included Ecotricity making a failed bid to buy Good Energy for 340p per share in 2021 – and more recently attempting to unseat some of its directors.

The cause of Ecotricity’s unhappiness seems to be Good Energy’s decision to reposition itself as an energy services business, following the departure of its founder Juliet Davenport. Electricity and gas are now just seen as one of the services the company can supply.

In fairness, this strategic shift may have been underway before Ms Davenport stepped down. But it’s definitely stepped up a gear since she left. Under chief executive Nigel Pocklington, the company has acquired both a solar panel installer (Wessex EcoEnergy) and a heat pump installation specialist (Igloo Works).

Good Energy is also part-owner of the Zapmap EV charging app and led its Series A funding round in 2022.

Further acquisitions are said to be possible as Mr Pocklington continues to try and expand Good Energy’s footprint in these growing, capital-light markets.

This chart from the 2023 half-year results provides some clues as to why Good Energy may have adopted this strategy and decided to switch away from being a pure generator/energy supplier:

Source: H1 2023 results presentation

Right now, the vast majority of Good Energy’s revenue still comes from its energy supply business. This is expected to change, making the outlook somewhat less certain than it might have been.

In a recent note available on Research Tree, broker Canaccord Genuity noted that its forecasts for later years now reflect “a greater degree of caution on the development of the services businesses”.

My impression is that Good Energy is moving into markets that are increasingly competitive and are also attracting other larger players in this sector.

For example, both E ON SE (ETR:EOAN) and British Gas (part of Centrica (LON:CNA)) now offer solar panel and heat pump installation, plus EV charging solutions. Both groups benefit from having much larger customer bases to which they can market targeted offers.

Recent trading/outlook

Good Energy’s half-year results showed revenue up 45.6% to £156.1m, while operating profit rose to £14.1m (H1 2022: -£0.5m loss). However, the company cautioned that “some of this” profit was expected to unwind in the second half of the year, due to “lagging commodity costs and tariff reductions”.

The company provided this chart to help explain the expected squeeze on margins during the second half of the year:

Good Energy makes use of hedging to reduce the level of commodity price risk it accepts on bought-in energy. But for an outsider, I think it’s quite difficult to understand all of the moving parts behind the group’s costs and revenues.

The unusually high level of feed-in generation from the company’s customer base also seems to make things more complicated. Good Energy has a number of tariffs that are aimed at feed-in customers and is also one of three deep green suppliers with a permanent exemption from the Ofgem price cap.

Modelling all these variables is way beyond my ability or sector knowledge, so I’m reliant on management guidance and broker notes.

Trading update & outlook: fortunately for investors, Good Energy has recently updated its guidance for 2023.

In an update on 28 November, the company said that the forecast loss for H2 2023 is now expected to be reduced, with trading to the end of October “ahead of expectations”.

A mild start to the winter and “stable” renewable generation mean that full-year profit guidance has now been increased:

Good Energy expects to deliver earnings ahead of the Board's expectations for the full year seeing a profit before tax of at least £4m.

Stockopedia’s brilliant consensus trend chart suggests this has resulted in an increase in forecast earnings from 10.5p per share to 19p per share this year, although 2024 forecasts are unchanged:

After the stock’s recent rapid gains, these forecasts put the stock on a 2023 P/E of 18, falling to a FY24 forecast P/E of 13.

I don’t know whether further upgrades (or downgrades) are likely. The UK weather certainly seems to have become more wintry since the end of October, at least where I live.

However, there are a few interesting points I’d like to share from the StockReport that highlight the early impact of the company’s strategic shift.

Profits up, quality up?

We already know that last year’s high energy prices were generally good news for (well run) energy suppliers. Good Energy’s results for the last 18 months seem to reflect this picture, although the numbers are complicated by profits from the generating portfolio disposal.

Strong revenue growth in 2022 and 2023 has been driven by higher energy prices, not by any contribution from its services business. Brokers expect energy services to contribute less than £5m of revenue in 2023.

Note how revenue estimates are slipping lower to reflect falling energy costs, though:

To get a quick snapshot of profits, I’ve opted for the normalised EPS line in the StockReport. As far as I can see, this has been adjusted to exclude gains from disposals last year and is more of a reflection of continuing trading in the business.

Following the recent upgrade, earnings are expected to rise this year and continue rising in 2024 (ignoring the TTM eps figure):

Starting in 2024, broker Canaccord expects the energy services business to make a positive and growing contribution to profit, potentially supporting higher margins.

In the meantime, Good Energy’s balance sheet looks strong to me. Net cash stood at £29m at the end of June, thanks to the cash received from the disposal of its generating portfolio:

Generating electricity is a capital-intensive business that only delivered single-digit returns on capital employed for Good Energy. By moving to a capital-light model where the company buys in the power it needs to supply its customers, profitability has improved dramatically.

Here we can see the reduction in fixed assets resulting from the disposal:

There has also been a consequent increase in profitability, although I think the 2022 figure is more representative than than the TTM figure, given Good Energy’s expected H2 loss:

Capital expenditure requirements have also fallen sharply, which could support stronger levels of free cash flow:

Conclusions

Good Energy’s recent share price gains have pushed down its ValueRank from 95 to 87 over the last month. That’s still a decent score though and I do think the shares could still be reasonably valued if Good Energy’s service-driven growth plan succeeds.

In recent years, the group’s energy supply business seems to have stagnated. As far as I can see, the number of supply customers and the total amount of energy supplied have both flatlined or fallen slightly since 2019.

Given this, I think the move into energy services probably makes sense in terms of providing a more meaningful growth opportunity.

Good Energy’s main differentiators appear to be its focus on greater integrity and accuracy in renewable certification, and its continued focus on decentralised generation and export tariffs.

Combining this brand offering with energy services solutions could be an attractive offering for residential and business customers who are not solely focused on cost and who also appreciate Good Energy’s deep green credentials.

In supermarket terms, I reckon Good Energy should aim to be Waitrose, versus the Tesco (LON:TSCO)-style offering we might expect from British Gas or E.On.

Good Energy’s share price looks up with events to me for now. But if the company continues to deliver on its growth potential over the next few years, I think it could become a significantly more valuable business.

I don’t feel enough conviction to consider buying the shares at the moment. But this is certainly a business I plan to keep an eye on.