Share tip of the week: Secure, predictable utility

By Paul Hill Oct 23, 2009

Paul Hill

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Energy regulator Ofgem reckons energy bills for British homes could jump by up to 60% by 2016. This is to fund £200bn of investment into the power generation and transmission infrastructure needed to meet climate change targets and prevent future electricity blackouts. If oil and gas prices spike too, the rise in costs could be far higher.

Grim news for consumers – but great for Eaga, Britain's largest provider of residential energy efficiency products. Eaga is the sole administrator of the government's £395m Warm Front scheme. This shows families how to cut their power consumption to get out of fuel poverty (which is when a household spends more than 10% of its disposable income on energy).

By installing modern heating systems and insulation, Eaga benefits from any work done. It also helps utilities to meet their obligations under the UK's Carbon Emissions Reduction Target scheme. For the year ending May 2009, Eaga advised 259,000 houses on energy efficiency, installed 45,000 new boilers, conducted 434,000 maintenance check-ups for social housing landlords, and shrank Britain's carbon footprint by 9.1m tonnes.

And with electricity prices set to rocket, investment in renewable technology will become more attractive. A new Energy Bill (to be approved in December) will subsidise the installation of domestic solar panels to produce electricity to sell back to the grid.

Eaga (LSE: EAGA ), rated a BUY by Panmure Gordon

If the legislation is passed, this will be a major boost for Eaga. It could create up to £400m worth of work in the years ahead, offering recurring maintenance and servicing income. The government's commitment to carbon reduction also means Eaga looks relatively safe from post-election spending cuts, especially as much of the funding will come from utilities.

But energy efficiency is just part of the story. The firm is applying its skills in other areas, such as business process outsourcing as well as the delivery of a £500m contract for the BBC to help the switch-over from analogue to digital broadcasting technology.

Taken together, this means nearly all Eaga's turnover comes from government or regulated entities. That makes for outstanding earnings visibility; Eaga has already bagged around 90% of this year's revenues. The City expects 2009/10 sales and underlying earnings per share (EPS) of £800m and 14.6p respectively, putting the shares on a mean p/e of ten, despite its strong balance sheet (net cash of £31m).

The main risk is Eaga's reliance on a few key programmes (Warm Front represents around 50% of turnover). But these initiatives are being extended due to their environmental and cost-saving benefits, so Eaga's prospects look secure. Panmure Gordon has a price target of 175p.

Recommendation: BUY at 152p

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

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