Gamble of the week: A hot, small energy company

One of the reasons to invest in smaller firms is that you might find one where you make several times your original stake – the proverbial ten-bagger.

You do this by finding a firm when it’s small and young, but destined to become large and successful. Of course, most don’t turn out this way, and more often than not investors are likely to make big losses rather than big profits. A lot of luck is needed.

This small-cap helps companies reduce their energy costs, a growing problem in recent years. It negotiates prices with energy suppliers and also offers services to help firms use less energy and lower their carbon footprint.

At the moment the bulk of Utilitywise’s (Aim: UTW) income comes from commission payments from energy companies.

The company is growing fast and is taking on more staff to target potential customers. It’s also been buying firms to add more services and gain a bigger share of this fragmented market. Its share price has soared since it floated on the Aim market back in 2012.

Unlike many hot stocks, Utilitywise is profitable and pays a dividend. Pre-tax profits increased by 78% in 2013, with analysts expecting earnings per share (EPS) growth of 60% and 40% in 2014 and 2015 respectively.

This is based on the fact that it is growing its customer base rapidly, with the value of contracts nearly equivalent to last year’s turnover (£23.8m) waiting in the wings.

Utilitywise share price chartThe management owns plenty of shares, which is a good sign. On 21 January non-executive director Jeremy Middleton splashed out on £3m worth of shares at 260p each.

There are some risks though. The commission fee structure of so-called third-party intermediaries in the energy market is unregulated and could change. Competition might increase and reduce profits.

It also seems likely that Utilitywise will look to buy firms to grow and might issue extra shares to do so – which could risk diluting existing shareholders’ interests.

However, with a market that could grow significantly in the years ahead, the shares look interesting despite their stellar rise. Consensus analyst forecasts put them on 21 times 2014 earnings falling to 15 times in 2015. If the growth comes through, then today’s share price may look to have been a very fortunate buying level.

Verdict: worth a gamble