SIF Folio: iEnergizer could deliver 6% yield and 20% growth

The recent stock market wobble has combined with growing caution economic growth to cut the results of my SIF folio share buying screen to just eight stocks. Most of them are already portfolio members, or else are unsuitable for some reason.

By disabling individual screening rules, I can see that valuation and weakening momentum are the main roadblocks. Disabling either my earnings yield or 1yr relative strength rules increases the number of qualifying stocks from eight to over 30.

In search of new ideas, I’ve turned to the relaxed version of my screen. This offers a wider range of stocks, due to slightly more relaxed valuation criteria.

My rules stipulate that I shouldn’t buy from the relaxed screen unless I’ve been unable to buy a stock from the main screen for at least four weeks. For this reason, I won’t add a new stock to the portfolio this week. But I might be able to line up a potential purchase for some time in the near future.

iEnergizer (LON:IBPO)

The company I’ve chosen to look at is £746m AIM stock iEnergizer, an outsourcing group based in India. iEnergizer’s services are divided into two segments:

• Business process outsourcing (63% of FY21 revenue): providing services such as call centres, technical support and back-office services. Sectors include healthcare, banking, insurance and gaming.
• Content delivery (37% of FY21 revenue): outsourced provision of eLearning and digitisation services

It’s a fairly sizable business, with revenue of $200m and $60m of profit last year. I’m not sure if the company has much of a following among UK investors, but the shares have been a multibagger for investors who have spotted the opportunity in recent years:

These share price gains have been backed by solid profit growth:

And the business appears to have gained the support of a number of well-known institutions:

The elephant in the room here is the presence of controlling shareholder and founder/CEO Anil Aggarwal, who effectively retains complete control over the business. iEnergizer’s free float is small, at 17%. Although liquidity does not seem too bad, I’d guess it could be a problem during a sell-off.

iEnergizer is well-rated by Stockopedia’s algorithms and has strong quality and momentum scores.

I think the stock could be worth a closer look.

Value: better than it seems?

ValueRank: 46

iEnergizer’s ValueRank of 46 and High Flyer rating suggests the shares may not be especially affordable. The valuation chart on the StockReport looks rather mixed:

Cash flow: As this is a service business, I think the main metric to focus on here is price/free cash flow. For a growing business, a price/free cash flow ratio of 12.6 seems very affordable to me, implying an 8% free cash flow yield.

My sums suggest underlying earnings per share broadly in line with Stockopedia’s estimates, so I’m happy to rely on this figure.

Earnings: The second valuation number that interests me is the price/earnings ratio for the same period. This comes in slightly higher, at 15.3. This implies earnings were slightly lower than free cash flow per share.

I think this can largely be explained by non-cash charges such as depreciation and amortisation, which appear to be greater than cash capital expenditure.

iEnergizer’s free cash flow has historically tracked ahead of its earnings, according to Stockopedia:

Debt: Strong cash generation has allowed the company to maintain a fairly strong balance sheet.

Last year’s sudden increase in debt was due to a new credit facility being taken out to repay existing debt and fund a large special dividend of $127m (49.4p per share).

Although I’m not a fan of using borrowed cash to fund dividends, iEnergizer’s debt levels remain comfortable, in my view. Net debt of $111m at the end of September represented leverage of 1.4x EBITDA.

Dividend yield: Last year’s ordinary dividend (excluding the special payout) gives the stock a trailing yield of 4.7%. For the year ended 31 March, broker forecasts suggest a yield of 5.2%. However, the company’s results have not yet been published, so we can’t be sure.

This level of income looks potentially attractive to me, as it appears to be supported by strong cash generation.

My view: I think iEnergizer looks reasonably valued when measured against earnings and free cash flow generated by the business.

Quality: very profitable

QualityRank: 85

iEnergizer scores highly for quality, thanks largely to its strong profitability:

These are excellent figures in my view. Profitability seems to have steadily improved in recent years, although I’m not sure how much further these numbers are likely to rise.

The stock’s high quality score is also supported by a solid F-Score rating, showing improving fundamental health across a range of nine criteria:

My view: iEnergizer appears to enjoy high profitability and excellent cash generation. Based on these figures, I’ve no concerns about the quality credentials of this business.

Momentum: very promising

MomentumRank: 91

I’ve already touched on iEnergizer’s strong track record of share price and profit growth. The question is whether these attractions will remain intact in more uncertain economic conditions.

As usual, I’m going to split the MomentumRank into its two core factors in order to take a closer look at this situation.

Price momentum: iEnergizer’s technical momentum appears to be quite strong. Based on technical factors such as moving averages and relative strength, iEnergizer scores well:

Earnings estimates: The company’s most recent trading update was on 21 February and guided for “another record year significantly above last year’s numbers”.

This statement appears to have triggered a material upgrade to FY22 and FY23 earnings forecasts from iEnergizer’s house broker:

Much has changed in the world since 21 February, so I’ll be interested to see an updated outlook statement from the company in June, when iEnergizer’s results for the year ended 31 March are expected.

Current broker forecasts suggest earnings growth of 30% in FY22 and 20% in FY23. Based on these forecasts, the shares currently trade on 12 times forecast earnings, with a potential dividend yield in excess of 6%:

My view: iEnergizer shares do not look overly expensive to me and appear to be enjoying strong momentum. If this can be maintained, then I think the stock could have significant upside potential from current levels.

My verdict

My rules don’t allow me to add iEnergizer to SIF today. But I’ve been impressed by the profitability and growth of this business. I’d certainly consider adding this stock to SIF if the opportunity arose.

I estimate that a 12% share price drop would be required for the shares to qualify for my main buying screen today. That’s around 350p – a level the shares saw briefly in May and in March. I don’t think it’s too hard to imagine a repeat over the coming months, so perhaps a patient approach will allow me to secure a better entry point.

If I do get a chance to add iEnergizer shares to SIF, I’ll report my decision here before I make any virtual or real trades. For now I will watch and wait, ahead of June’s full-year results.

I’d be interested to hear more from subscribers with experience or opinions on this business. I haven’t researched iEnergizer itself in much detail – that’s not part of my SIF process. What am I missing? Are there risks I’ve overlooked?