ERM Power switches on

ipad-art-wide-ERM-POWER-420x0ERM Power (ASX: EPW) is a Brisbane based supplier of electricity to commercial and industrial customers on the east coast. Clients include government, manufacturing and retail industries.

Listing in December 2010 at $1.75 per share, ERM spent a short time trading above issue price before sliding to a low of $1.35 in September 2010. A slow grind upwards has continued since then. Market conditions at the time made it very easy for investors to ignore a small and relatively complex business model.

Quest purchased shares in the float and have added more since. Following the annual result in October 2012, the share price pushed through to $2.40 suggesting someone other than Quest had developed an interest in the stock.

ERM are in the business of winning corporate customers from the larger suppliers and they seem to be good at it. The competitive advantage is a higher service level  based on accurate and timely  billing and diagnosis of power usage to assist customers in power saving. Recently released data shows customer satisfaction levels are high compared to the competition. The steady stream of commercial customers moving to ERM is now causing some angst among the incumbents. ERM  is now a significant player with greater than  5% of national electricity sales.

The upside lies in the winning of more commercial and industrial business, particularly in Queensland and NSW. ERM is also looking to tackle the Small and Medium Enterprises market, believing the offering is well suited to that segment. ERM also has interests in power stations and gas exploration but it is the contracting and on selling of power supply that drives the business. Risks include the volatility of the electricity price, hedging associated with contracts of supply and competitor response.

ERM Power rates as a “B’ on our Q Stocks ratings, trades on a forward PE of around 15 and yields 5% fully franked in 2014. Our price target has not been reached at the time of writing.