Monday, July 5, 2010

Just Energy Income Fund

I would not invest in this company (TSX-JE.UN). There are two things I have against it. For one, it has a negative book Value. The other is far more serious. This company makes its money as an electricity and gas reseller. You have probably met one of the representatives of these sorts of companies. They come to your door and ask if you want protection from future electrical rate increases. They do not really make clear what it is they are selling.

I think the main problem is that they do not explain well the process. What the resellers do is charge you a higher fixed price that what you now pay. The theory is that since the cost of your electricity will rise in the future, over the 5 years of the contract, you will pay an overall lower right. Most complains seems to be centered on the fact that people do not realize that their current cost for electricity will rise above what they now pay and they want to get out of the contract they have signed.

The reason the company took a hit was because of changes in fair value of derivative instruments. When I invest in utility companies, I want companies that are solid and boring and, well, conservative. I want no surprises and I want the utility companies I invest in, on a long term basis, give me a return of about 8% a year, basically half in dividends and half in increase in the value of my shares. I want a very low risk company. I do not think this is a typical utility company in regards to investment risk. I do understand that this company has been getting a lot of attention lately, and many analysts are recommending it.

So, I will go on to talk about its growth figures. The worse, besides book value, is the total return over the last 5 years and that has been at 5.6% per year. The 10 year growth in total return is great at 37.5% per year. (Please note that while past growth can be a guide to how the company is doing, it is no guarantee for future returns.) The growth in Revenue is good and the 5 and 10 year rates for revenue per share are 14.5% and 29.6% per year respectively.

Both growth in earnings and cash flow has been similarly good. My favorite growth is in dividend yield and the 5 and 10 year growth in this area is 8% and 19% per year, respectively. The Book Value is the problem and it has been declining since the company went public in 2002. In March 2009 it was $-6.21 per share and for March 2010 it was $-3.75 per share. The problem is the big hit this company took in the year ending March 2009. (This company has financial statements dates at the end of March each year.)

The problems of 2009 also leaks into the Liquidity Ratio and the Asset/Liability Ratio. Both these ratios are both below 1.00 (with ratios at 0.15 and 0.73 respectively). The company is also paying out their whole cash flow in dividends. I know that for unit trust companies, we are to look at the distributable cash and they are paying out about 80% of this. The problem with distributable cash is that the way it is calculated is always changing. The other point is this company is going to be a corporation soon. They have said that as a corporation will are not changing the distribution rate.

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 Fund also offers “green” products through its Just Green program. National Home Services, the Fund sells and rents high efficiency; and tankless water heaters; rental of air conditioners; and furnaces to Ontario residents. Through its subsidiary Terra Grain Fuels, the Fund produces and sells wheat-based ethanol. Its web site is here JE. 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.

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