| 2022 | 2023 | ||||||
| Price: | 5.34 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 27 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 145 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 35 | EBIT | 0 | 0 | |||
| TEV (in $M): | 110 | TEV/EBIT | 0 | 0 | |||
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Bet: We are buying the Core business – a Retail Energy Provider (REP) – for cheap (2.8-3.7x EBIT) and getting free optionality on the nascent (but breakeven) Renewables segment. There is a blue-sky scenario where Renewables becomes the new growth engine for the company and is worth a significantly higher multiple than Core.
I appreciate what the Jonas family did at IDT: generating significant shareholder value by bootstrapping growth businesses like NRS, net2phone, etc. I think the same thing could be happening at GNE in the Renewables segment. The family has a history of finding scrappy ways to make money.
Background:
GNE was last written up on VIC in 2012 as a recent spin from IDT. The story is quite a bit different today. Over the past few years, the story centered around drilling for oil in Colorado and Israel. This exploration was funded from the Retail Energy segment’s cash flows. The last of the drilling was wrapped up in 2020 and the business now consists entirely of Retail Energy and the nascent Renewables segment (described below).
Genie is a global provider of energy services that supplies electricity and natural gas to residential and small business customers in the United States and Europe. The difference between the net sales price of electricity and natural gas sold to its customers and the cost of their electricity and natural gas supplies are the REP business’s gross profits. Genie evaluates its customer base both in terms of the numbers of meters served and the number of Residential Customer Equivalents ("RCEs") represented by these meters. An RCE is a unit of measure denoting the typical annual commodity consumption of a single-family residential customer. One RCE represents 1,000 therms of natural gas or 10,000 kWh of electricity. The International business consists of UK (being wound down), Sweden, and Finland and is profitable ex-UK. GNE salespeople are door to door and telemarketers and sell this service to customers.
Howard Jonas is thought to be a good capital allocator. He is chairman of GNE and his son-in-law is CEO. Jonas took cash flows from IDT’s traditional telecom business and allocated them to growth investments like NRS and net2phone, increasing the value of IDT over the last few years.
Capital Structure:
$5.45 * 26.7mm shares = 146mm market cap – 40.5mm cash + 19.7mm preferred = 125mm EV. Net cash is 78c/shr. I believe the company will collect at least 14mm more cash next quarter from its UK winddown for an adjusted EV of 111mm. Adj net cash would be $1.30/shr.
US Retail Energy could generate 30-40mm of EBIT next year. International could generate ~7mm EBIT offsetting corporate of -7mm. I define this 30-40mm of EBIT as “Core”.
Adj EV/Core EBIT = 3.7x 30mm or 2.8x 40mm. I believe Core deserves a low multiple due to its high competition, low barriers to entry, and high churn (but offset by decent unit economics, low/no capital intensity and high ROIC). That said, I think 3.5x EBIT is too low.
Renewables is a wildcard that I am treating as an upside call option.
EV Adjustment - From 3Q21 10-Q subsequent events:
United Kingdom Market
In October 2021, as part of the orderly exit process from the United Kingdom market (see Note 1), Orbit and Shell agreed to terminate the exclusive supply contract between them. As part of the termination agreement, Orbit was required to unwind all physical forward hedges with Shell which resulted in net cash proceeds after settlement of all related liabilities with Shell. These proceeds, together with the existing cash and accounts receivables as of September 30, 2021, are expected to cover the cost to supply Orbit's current customers with electricity and natural gas until an orderly transfer of those customers is completed, and to exceed Orbit’s liabilities and carrying value of goodwill at September 30, 2021 of $30.7 million and $13.9 million, respectively. Due to a wide range of outcomes related to the on-going exit from the United Kingdom market, the Company is unable to provide the expected net proceeds from the exit from the United Kingdom market at this time.
I believe GNE was required to add the highlighted parts to justify not taking further impairment. However, to me this implies excess cash of at least 13.9mm from UK.
Setup / Why The Opportunity Exists:
At $5.45, GNE is trading at the lower end of its 52-week range of $4.74-8.50.
Why The Opportunity Exists: GNE was known as an oddball oil & gas exploration play that eventually failed. The energy supply business was the “other” segment that helped fund the exploration. More recently, the stock traded down for the backward-looking reasons listed above. GNE is small, under the radar, and has no sell side coverage.
Basic Math:
US Segment
From 2015 to 2020, GNE’s US business has averaged $279 gross profit per avg RCE. The range has been fairly tight at $266-293. There were 336k RCEs at the end of 3Q21.
Churn over that time has ranged 4.4-6.6%/month and was 4.0% last quarter. Churn is currently low because of COVID-related dynamics. Assuming 6% churn or 72% annual turnover on 336k RCEs = 242k gross adds required to sustain volumes.
Management has gotten smarter about which customers they go after over time: recent gross adds are ~1.0 RCE/customer (larger households/those that need to use more energy).
According to management, customer acquisition costs about $100 per customer. Assuming 1.0 RCE/customer. 242k * $100 = ~24mm S&M.
300k RCEs * $280 = 84mm gross profit. 84 – 24mm of customer acquisition – 30mm G&A = 30mm of segment EBIT.
336k RCEs * $280 = 94mm gross profit. 94 – 24mm of customer acquisition – 30mm G&A = 40mm of segment EBIT.
The segment generated 27mm of EBIT in 2019, and 36mm in 2020. Meters are flattish over that time but RCEs are increasing as the RCE/meter mix shifts.
International Segment
After exiting the UK, International will be left with the Scandinavian business. The economics are similar to the US Segment. From the 3Q21 call:
We believe our Scandinavian business is outperforming the competition for higher-margin customers and has delivered positive income from operations of $4 million year-to-date.
…Scandinavia, which will, in the immediate term, constitute Genie Retail Energy International, or GREI for short. This business is already adjusted-EBITDA positive, and we expect to see increased profitability in 2022.
Call it 5mm of EBIT for 2021? And higher for 2022? I assume 7mm of EBIT.
Corporate Segment
Historically about -7mm.
Valuation Framework
As mentioned above, at $5.45, the adjusted EV of 111mm is 2.8-3.7x Core EBIT.
At 5x 30mm of Core EBIT, the stock would trade at $7.00 (+27%).
At 6x 40mm of Core EBIT, the stock would trade at $10.30 (+88%).
This assumes no value for Renewables.
Renewables
There is optionality from the renewables segment. This segment appears to be at an inflection and might one day become a hidden gem.
The renewables segment is comprised of two sub-segments: commercial solar installation (Installation) and community solar enrollment (Enrollment). Historically the segment only consisted of Installation.
Installation used to be low margin and breakeven/slightly money losing- they were a reseller/installer of off-the-shelf solar options for commercial customers. GNE pivoted from this strategy in 2021 after completing a large contract in 2020. Now their Installation is Customized.
Customized Installation includes customized paneling, custom racking systems, finding the finance partners, etc. This is a more valuable service for the market which is beginning to show up in higher gross margins (~25-30% vs <10%). All materials, installation, financing costs and sales commissions are captured in COGS. SG&A is very low. These are 6-12 month lead time projects so contract wins in 2021 will begin to show up in the next few quarters. Management says there is a low/mid-single digit backlog right now (measured on gross profit).
The second sub-segment is Enrollment, which enables community solar. (https://www.energy.gov/eere/solar/community-solar-basics) The government gives out incentives to developers of large community solar fields. As part of that agreement the developer must enroll customers as off takers for that electricity. GNE leverages its door to door/telemarketing channels from Retail Energy to find these customers. As such, there are very few fixed costs to this business. Basically GNE keeps half the commission and pays the other half to the salesperson. There is very little G&A.
Both of these opportunities are in their infancy but have compelling gross margin profiles with little SG&A. Given the pipeline of wins in the backlog, I believe it is highly likely the segment is profitable in 2022. My understanding is that this will become the new growth engine for GNE. Very Jonas-like.
If Renewables generates 6mm of EBIT at 8x it would add $1.80/shr to the valuation. If this segment continues to grow over time it could eventually encompass the majority of the value of the company.
I believe we are paying nothing today for this nascent but potentially very valuable wildcard. As mentioned above, I appreciate what the Jonas’s did at IDT in bootstrapping NRS, net2phone, etc. I think the same thing could be happening here. The family has a history of finding scrappy ways to make money.
Summary:
We are buying a solid, cash flowing Core business that is undervalued. There is also a potentially compelling optionality we aren’t paying for. I don’t think the market has figured out the new opportunity yet.
Catalysts
4Q and 1Q results
Investor outreach about new opportunities
** The thesis expressed above contains forward-looking statements and is intended for informational purposes consistent with the nature of this forum; it is not a recommendation to buy, sell, hold or otherwise trade the securities of the referenced issuer. The authors/their affiliates do not hold a position with the issuer such as employment, directorship or consultancy. The authors/their affiliates currently own a position in the referenced issuer's securities; however, that position may change at any time and without notice.
4Q and 1Q results
Investor outreach about new opportunities
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