Just Energy Group

I do not own this stock (TSX-JE). They used to be an Income Trust company called Just Energy Income Trust (TSX.JE.UN), and before that they were Energy Savings Income Fund (TSX-SIF.UN). They have a Wikipedia entry.

I must admit, I wonder at the viability of their business model. Just Energy's business involves the sale of natural gas and/or electricity supply to residential and commercial customers under long term fixed price. The company derives its profit from the difference between the price at which it is able to sell the commodities to its customers and the price at which it purchases them from its suppliers.

For its customers, it seems the choice is lower, but variability rate or a fixed and higher rate. Sometimes the fixed rate is much higher. Why would anyone go the fixed rate when it is a higher rate. It has to be higher rate because if it is not, Just Energy could not make any money. Personally, I would never go for a higher fixed rate.

It would seem that to get people to sign up, the company sales men have been less than honest. The complaints seemed to have slowed down, but maybe they have just switched media. See article in the Toronto Star dated May of 2010. I cannot find print online complains later than May of 2010. However, there are more recent ones on YouTube dated January 15, 2011.

So, what are they doing for their shareholders? Well, they have not raised the dividend since 2009. However, I must admit that most companies that went from Income Trusts to corporations haven’t either and a lot have lowered their distributions. And, the dividend yield is very good at 10.5%. That is higher than a lot of converted income trust companies.

On the down side, the Dividend Payout Ratios are very high. The 5 year median DPRs for earnings is 81% and for cash flow is 110%. The DPR for the financial year ending in March 2011 were lower for earnings at 33%, but not for cash flow at 110%. The DPR for Cash Flow minus the working capital is still high at 88%. For the financial year ending in March 2012, the corresponding DPRs are expected to be 167% for earnings and 88% for cash flow.

Their paying out too much in dividends is showing up in the Book Value. The Book Value turned negative in 2009 and has been negative ever since, although it is improving, if you can say that about a negative Book Value. In 2009 the book value was a negative $6.38 and it is currently a negative $1.58.

There are some bright spots. The revenues have been increasing nicely, with revenue per share up 14% and 29% per year over the past 5 and 10 years. The EPS is showing growth of 50% per year over the past 5 and 10 years, however, it would appear that earnings for the last financial year of March 2011 was usually high, so growth might be really be in the range of 9% and 33% per year over the past 5 and 10 years. This is still good. Cash flow has also been increasing nicely at the rate of 8% and 20% per year over the past 5 and10 years.

However, there are other negatives. Take debt Ratios. The current Liquidity Ratios is 0.67. This means that current assets cannot cover current debts. If a company has a good cash flow, this is not so problematic. The usual thing to look at is Cash Flow after dividends. However, this Ratio is also extremely low at 0.68. Not much improvement. The current Asset/Liability Ratio is also very low at 0.88. (Assets cannot cover liabilities.)

I cannot do any book value/debt type ratios as the company has a negative book value. So I looked at Debt and Cash Flow. The current Debt/Cash Flow Ratio is 9.39. You do not really like to see this over 2.00.

When I look at insider trading, I find insider selling at $4.2M and minimal insider buying. The selling all occurred at a relatively high point early in 2011 and the buying at a relatively low point in October 2010. There are 60 institutions that own 23% of the shares of this company. There has been buying and selling over the past 3 months and they have increased their holdings by 2.5%.

What do the analysts say? Well plainly they do not have the reservations about this company that I do. I can only find Strong Buy, Buy and Hold recommendations. They like the fact that the company has been expanding into long term variable –priced contracts and green energy products. They admit that the company has some challenges, but like the great dividend yield and feel the current stock price is attractive.

There may not be any sell recommendations, but there are some Don’t Buy recommendations. These analysts are worried about the dividend sustainability, about the weak balance sheet and business plan sustainability. (I pointed out the weak balance sheet when talking about debt ratios above.)

However, analysts giving buy recommendations like the dividend and feel it is sustainable. One buy recommendation came with a 12 months stock price of $14. The consensus recommendation is a Hold with a 12 month stock price of $13.17.

Personally, I like long term investing and why buy a company that has lots of problems when there are other great companies to buy. I would not buy this. I do not like the weak balance sheet. I do not like the negative book value. I do not like all the complaints about their selling tactics. I do not like to buy companies that people have complained about how they operate.

Just Energy’s business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts. Just Energy derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the associated volumes from its suppliers. The company also offers “green” products through its Just Green program. Through its subsidiary Terra Grain Fuels, the company produces and sells wheat-based ethanol. Its web site is here Just Energy. See my spreadsheet at je.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.