Making a business out of cutting costs

Tom Bulford looks at a small-cap energy consultancy that's doing good business slashing its clients' fuel bills

These days, we're all trying to save our pennies. That's why numerous comparison website companies have sprung up to find us the best deals. And in theory cutting costs seems simple: spend less and make your money go further.

But when it comes to energy buying, things can get a tad confusing. Especially considering energy companies are notorious for having confusing charges.

In a tough business environment and an era of high energy costs, making savings on things like energy are far too important to ignore. That's why more and more businesses are looking for external advice on how to save money.

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And the company I am going to tell you about today does exactly that: it helps companies slash their energy bills.

New entrants playing on the saving game

This AIM newcomer has just posted a positive trading statement. Intrigued, I picked up the phone to the company's boss, Janet Thornton, to find out a bit more about the business.

"I am one of the best bosses there is" she told me during our chat! Thornton might not be modest, but given the business she's built up, she doesn't have to be.

Thornton is convinced her firm, Inspired Energy (INSE) will be an AIM success story. She's not the only one to think so. Customers and former staff have left her competitors to join her at Inspired.

She told me that the business now has almost five hundred customers. Most of these are mid-sized businesses which want some help to manage their energy bills. I say manage' but I might just as well say understand'.

The smoke screens of the energy industry

Energy providers seem to follow a particular business strategy beloved of telecom providers and airlines which goes something like this.

"Let us," they decide, "make our schemes and tariffs as complicated as we possibly can. Let us have multiple different offers, dressed up in language that nobody can understand. That way we can make it look as if we are providing choice and value when actually we are deliberately setting out to confuse. Most of our customers won't have any idea which payment plan is best for them and will end up paying more than they should."

It's these smoke screens in the energy sector that have led to a whole new layer of intermediaries springing up. They're all trying to get to grips with these complexities and get the best deal for the bewildered customer. They unravel the intricacies of the charging schemes. In return, they receive commission by the energy providers to which they deliver customers.

A nimble approach to energy consulting

Thornton reckons there are about ten major players in this industry, with Inspired Energy the third largest nationally, but dominant in the north-west.

Inspired is looking to maintain its impressive record of growth. The easy way to achieve this is to sign up more customers, allowing Inspired to make better use of the platinum status' that allows it to get the best possible prices from suppliers.

But acquisitions are also on the radar and I shall be surprised if we have to wait long for the first of these.

This platinum status is a key selling point with potential customers, but Thornton was keen to emphasise that Inspired does rather more for its customers than its rivals. Most of the latter, she believes, do little more than aggregate the energy purchases of a number of smallish users in order to get volume discounts.

Thornton claims that Inspired offers a more tailored service. This starts with an analysis of energy usage and past bills. Then it sets out to advise on the best energy buying strategy. A nimble approach is essential. "The price has moved four times today already", Thornton told me on the phone. So the ability to spot a good deal both for immediate and future energy requirements is essential.

More and more companies are looking to save

Inspired avoids the very biggest energy users. These may well have their own energy purchasing teams. It also steers clear of the small business sector which can create a lot of work for little reward.

Examples of its medium-sized industrial customers are Newby Foundries and transport group, Bombardier, which has twenty-two sites across the UK. Inspired has reduced the energy bill of Newby by some £200,000. And a new flexible energy supply contract has saved Bombardier more than £300,000.

In this tough climate, I wouldn't be surprised to see more businesses looking for advice on how to make these savings.

Just last month Mitie (LSE: MTO) paid £16m for Utilyx, a consultant to large energy users that has annualised revenues of £7m. In comparison, Inspired Energy, which has annual revenues of c.£4m and a forecast 2012 profit of c.£2m, is now valued at £13m.

This valuation looks quite high. But still it will be interesting to see how Inspired Energy develops. With the redoubtable Bob Holt, former boss of Mears, as its chairman and one of the best bosses there is' as managing director, Inspired Energy will not be short of ambition. It's a stock that's worth keeping an eye on.

Let me know what you think

By the way, I'd be interested in knowing what you think about today's issue. Do you think this is a business that has potential? And let me know if you've seen any other interesting penny shares. Just leave your comments below.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.