It's best to buy the "slowly but surely" tortoises when sentiment is against them.
Eaga (LSE: EAGA) couldn't really find itself in much more of an unfashionable market given the change in political hue this year has seen -- and the consequent focus on cutting public spending.
The company is the UK's biggest provider of "energy efficiency solutions" and occupies the market space between government-funded initiatives and the public; managing grant-funded programmes aimed at providing heating, insulation and installations thereof, in environmentally-friendly ways.
The company manages all four regions of the government's "Warm Front" programme which aims to make homes warmer, healthier and more energy-efficient, providing insulation and heating improvements up to the value of £3,500.
Some hot air
Dependent as it is on the public purse, it's little wonder that the market has trashed Eaga's shares of late, sending them from 160p in March to a low of 97p last week. Thursday's final results, though, have put a small amount of hot air in Eaga's balloon. The shares are up a little to 104.5p at the time of writing, valuing the FTSE 250 green group at £265m.
Anyone looking for real excitement with their investments should certainly stop reading now. Eaga isn't going to set the world on fire any time soon. But it may well provide a steady return -- and many of us quite like boring shares.
There's no real evidence of a slow-down in performance as yet. Eaga reported a 10% rise in pre-tax profit for the year to the end of May of £41.5m on increased revenues £762.2m, despite an 11% reduction in funding for the Warm Front scheme. Performance is weighted towards the second half for obvious reasons.
The company is also feeling confident enough about the future to raise the dividend to 3.85p for the full year representing a respectable yield of 3.6%.
Confidence
Whilst the coalition government has signalled that front line services will be least affected by a reduction in funding levels, Eaga isn't expecting to hear any further details on future funding levels for fuel poverty programmes until the current spending review has been completed in October. This will, inevitably, hold the company's shares back; the market doesn't like uncertainty. But Eaga reckons it is generally well-placed.
Of course, it would be no great surprise to see a contraction in areas of public spending directly beneficial to Eaga's business -- the question is to what extent this anticipation is already in the price and how successful the company will be in winning new contracts.
The brokers see full year earnings per share of 14.5p rising to 15.3p next year -- about which there is general consensus (i.e. the forecasts don't vary too much).
As I said, it isn't exciting stuff by any means, but the anticipated as price-to-earnings ratio of 6.8 looks too low for a company which operates in a reasonably steady environment and whose valuation is almost 60% accounted for by net assets, with around 15p per share in cash despite an acquisitive history.
Eaga is also cutting costs via a voluntary redundancy programme which will see 223 "Partners" leaving the business. The company refers to its staff as partners (it was restructured into an employee-owned limited company in 2000) and 37% of its shares are owned by the Eaga Partnership Trust; an independent trust which holds the shares for the benefit of all the partners.
If and when sentiment changes, a re-rating to the kind of level more commensurate with a company that is tantamount to a utility in many ways should see the shares offering a decent capital return for long-term investors who prefer the tortoise to the hare.
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