Inspired Energy. Realising the growth potential. Strong growth record. Order book provides platform for growth. Valuation: Pricing growth

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1 Inspired Energy Realising the growth potential Initiation of coverage Industrial support services Inspired Energy is well placed to take advantage of the growth opportunities afforded by the fast-growing and fragmented third-party intermediary (TPI) market. We expect strong organic growth in both the corporate and SME divisions to be supplemented by acquisitions where they add to Inspired Energy s service offering and to its geographical reach. Year end Revenue ( m) PBT* ( m) EPS* (p) 12/ / /14e /15e DPS (p) Note: *PBT and EPS are fully diluted normalised, excluding intangible amortisation, exceptional items and share-based payments. P/E (x) Yield (%) 8 May 2014 Price 13.5p Market cap 55m Net debt ( m) 2.1 Shares in issue 409.7m Free float 46% Code INSE Primary exchange LSE Secondary exchange N/A Share price performance Strong growth record The recent FY13 results confirmed the continuation of the strong trend established by Inspired Energy in recent years. Year-on-year growth figures were impressive: revenue up 45%, EBITDA up 34%, adjusted EPS up 40% and the proposed dividend up 55%. Since 2011 Inspired Energy has achieved a CAGR in revenue of 44% and a CAGR in the corporate order book of 53%. Order book provides platform for growth Inspired Energy is seeking to continue its impressive growth trend through a combination of organic and acquisitive growth. The growth achieved in the corporate order book last year and growth since the year end (from 11.0m to 11.3m) establishes a strong platform for earnings progression in The rapid growth achieved in the SME business in 2013 and the plans for headcount additions in the current year should also favour growth. We believe that the fragmented market for TPIs offers attractive growth opportunities and that Inspired Energy is well placed commercially, operationally and financially to exploit that growth potential. Valuation: Pricing growth Market expectations of continued growth at Inspired Energy have driven rapid share price appreciation in recent months. We believe that PEG ratios provide a better guide to valuation than static multiples as they more accurately reflect the rapid growth expected at Inspired Energy. Aligning Inspired Energy s PEG ratio to that of the All Share Index produces a valuation of c 13.5p/share using base case forecasts but c 22p/share using more aggressive assumptions for growth in corporate order book sales. Based on our cash flow forecast, the current share price of c 14p implies discounting the cash flow at c 8.5% and a perpetuity growth rate of 2%. Using the more aggressive assumptions, a discount rate of 11% and no perpetuity growth is required to produce a share price of 14p. % 1m 3m 12m Abs Rel (local) (1.7) week high/low 17.3p 4.6p Business description Inspired Energy is an energy (electricity and gas) procurement and management services company. Next events AGM May 2014 Interim results August 2013 Analysts Graeme Moyse +44 (0) Roger Johnston +44 (0) industrials@edisongroup.com Edison profile page Inspired Energy is a research client of Edison Investment Research Limited

2 Investment summary Company description: Energy procurement specialist Founded by Janet Thornton in 2000 and based in Lancashire, Inspired Energy provides energy procurement and a range of other energy market related services, including energy efficiency, market analysis and bill auditing, to UK corporate and SME businesses. Inspired Energy also has a fledgling business in Ireland. Valuation: PEG ratios best way to capture growth story We believe that PEG ratios provide a better guide to valuation than static multiples as they capture the rapid growth expected at Inspired Energy. Aligning Inspired Energy s PEG ratio to the PEG ratio of the All Share produces a valuation of c 13.5p/share using our base case forecasts but 22p using the bull case forecast based on more rapid corporate order book sales. We have also constructed a DCF, which provides a range of indicative values. Using base case forecasts, a discount rate of 8.5% and a perpetuity growth rate of 2% yields a share price of c 14p/share. Using more aggressive growth assumptions, a discount rate of 11% and no perpetuity growth is required to produce a share price of 14p. Financials: Continued growth Revenue We are forecasting revenue of 9.8m for 2014 and 11.8m for 2015 based on an expectation of continued growth in the corporate order book. Gross profits and EBITDA We expect gross margins for the corporate business to remain above 90% in 2014 and 2015 and margins in the SME business of between 50-55% for the same period. We expect EBITDA of 4.4m in 2014 and 5.4m in 2015 before 0.2m of share payment costs in each year. Dividend We are forecasting a payment of 0.20p for 2014 and 0.23p for 2015, resulting in dividend cover (diluted basis) of over 3x in each of the next two years. Cash flow We expect 2014 will be a year when heavy demand will be placed on cash flow from tax payments and deferred consideration. As a result we expect only a modest decline in net debt to 2.0m in 2014 before moving into a net cash position in Risks and sensitivities: Sensitive to growth Key personnel The loss of key staff constitutes a significant risk for Inspired Energy. However, management remain closely tied into the success of the company. Founder and Managing Director Janet Thornton and Sales Director Matthew Thornton retain 17% each of the company s shares. Acquisition Part of Inspired Energy s strategy is to grow through acquisition and like all acquisitive companies there is a risk that Inspired Energy overpays for any acquisition. Competitive pressures The market for TPIs is undergoing a process of consolidation, which could lead to intensified competition in the long term. In the short term its relative scale, financial firepower and product range could allow Inspired Energy to act as a market consolidator and grow its business at the expense of smaller rivals. Regulation In the event that Ofgem s current proposals are perceived not to be working properly further tightening of the regulation could constitute a risk to Inspired Energy s business. Failure to grow Growth is a key part of Inspired Energy s equity story. Failure to achieve market expectations of growth would constitute a risk to the profitability and valuation of the company. Inspired Energy 8 May

3 Company description: SME growth opportunity Inspired Energy offers energy procurement and a range of other energy services to corporate and SME customers. The company has successfully grown customer numbers and expanded the product range in recent years, enabling it to show impressive improvements in profitability. With the experienced founding management team in place, a solid market position and a modestly geared balance sheet, Inspired Energy has the expertise and firepower to continue to grow. Energy services provider Inspired Energy offers a range of services to its customers, including energy review and benchmarking, energy purchasing, bill validation, historical audits and The CRC Energy Efficiency Scheme. However, energy procurement is responsible for generating the majority of Inspired Energy s revenues. The energy procurement business offers its customers three main types of contracts: fixed, flexible and risk managed, spread across its two major business units, SME and Corporate. Inspired Energy s corporate business offers fixed, flexible and risk managed contracts to its larger customers and receives revenue (commission) from the energy supplier in relation to the customers energy usage. Payment is usually received about two months in arrears of the client s actual usage and the commissions are not influenced by short-term fluctuations in the tariff. Corporate was responsible for generating over 80% of group revenue and over 90% of EBITDA in The SME business, which only began operations in 2012 and trades under the EnergiSave banner, offers fixed rate contracts to Inspired Energy s smaller corporate customers. This business has been growing rapidly and traded profitably in 2013 and will be further boosted by recent acquisitions. Inspired Energy claims a customer retention rate of 85% for the corporate business as a whole and a 100% retention rate for those larger corporate clients taking risk managed contracts. Expansion of product range and geographical coverage Inspired Energy s business strategy is focused on four areas: customer services, product innovation, customer diversification and acquisitions. In 2012 Inspired Energy introduced the multicustomer management solution, providing customers the benefit of aggregating demand and other recently developed services include advice on energy trading, water audit and procurement and European contracting. In 2012 Inspired Energy also completed the acquisition of DEP and recently acquired KWH Consulting and Simply Business Energy (SBE), which will boost the presence of its existing business, EnergiSave, in the SME market. In particular Inspired Energy is focused on businesses that offer additional technical or service capability, sector specialism or product and customer or geographical diversification. Further customer diversification will come from both organic initiatives and acquisitive growth. Founding management team remain in place The management team of Inspired Energy remains unchanged since its flotation on AIM in November 2011 and Janet Thornton, founder of Inspired Energy, remains on the board as managing director. In addition to managing the business, Janet Thornton is active in negotiating contracts for Inspired Energy s larger customers and product development. Matthew Thornton, who has been with Inspired since 2002, is sales director. The management team retain a significant stake in the business with Janet Thornton and Matthew Thornton each holding c 17% of the company. In addition, as at 31 December 2013 there were 20m options to subscribe for shares outstanding and a further 5.05m options have been granted since the year end. Inspired Energy 8 May

4 Continuing the growth story Inspired Energy has achieved rapid growth since its flotation on AIM. The company is seeking to continue this growth trend through a combination of organic and acquisitive growth. We believe that the fragmented market for TPIs offers growth opportunities and that Inspired Energy is well placed commercially, operationally and financially to exploit that growth potential. FY13 results confirm growth trajectory The FY13 results from Inspired Energy confirmed the continuation of the strong trend seen in recent years. Year-on-year growth figures were impressive, with revenue of 7.62m (+45%), EBITDA (before share-based payments) of 3.55m (+34%), adjusted EPS of 0.67p (+40%) and the proposed dividend for the year of 0.17p (+55%). Net debt rose slightly, to 2.1m, (net debt/ebitda 0.59x), reflecting the payment of 1.1m of deferred consideration and 0.65m of dividend payments. The key driver of future profitability, the corporate order book, rose to 11m (+23%) with 6.2m of that figure due to be recognised as revenue in Post the year end growth continued and the order book reached c 11.3m as at the end of February. The new SME business also reported rapid growth generating in excess of 1.3m of revenue and reporting EBITDA of 0.35m in its maiden year of operation. The number of sales consultants, a key driver of growth, employed in this business had reached 39 by 31 December 2013 and Inspired Energy expects headcount to rise by around two a month on average in the coming year. Exhibit 1: Key growth indicators in the corporate business 000s 12,000 10,000 8,000 6,000 4,000 2, (n) Corp revenues Corp customer numbers Source: Inspired Energy, Edison Investment Research Corp order book Linear (Corp customer numbers) Energy supply markets Electricity and gas markets in the UK have been open to competition for more than 10 years. However, there are significant differences between the domestic and non-domestic energy markets with greater numbers of suppliers active in the non-domestic market. According to Ofgem there are 18 active domestic and 24 active non-domestic electricity suppliers. In the gas markets Ofgem has identified 16 domestic active suppliers and 30 non-domestic. Supply markets are dominated by the big six utility suppliers, which commonly own either gas production or power stations, allowing them to operate as both wholesaler and retailer. Within the non-domestic segment larger businesses are seen to more actively engaged with the competitive energy market, either through in-house teams or via TPIs. Surveys have shown that smaller corporates are less likely to engage with the competitive market although they are more likely to switch suppliers than domestic customers, at around 22% of the total market, compared to 12% for domestic consumers. Research carried out by Accent, for Ofgem in 2012, supports these Inspired Energy 8 May

5 findings and suggested that 31% of small and micro businesses had never considered switching their electricity supplier compared to 15% for larger businesses. TPIs and the non-domestic energy market Although the big energy suppliers have dedicated in-house sales teams servicing the corporate market, they also chose to address the non-domestic energy market by using TPIs, providing them with a flexibility of approach. The suppliers usually establish panels of TPIs with which they will transact business and we understand that in recent years suppliers have been reducing the number of accredited TPIs, favouring larger and more professional TPIs. EDF comments on its website, we only work with energy brokers that meet our high standards and have our pre-vetting process. TPIs are commonly incentivised by commission payments from suppliers. Ofgem has formulated a draft definition that describes a non-domestic TPI as an intermediary engaged in direct or indirect activities between a non-domestic consumer and an active energy supplier. As can be seen from the table below, TPIs encompass a variety of business models and can range from large organisations to one-man operations. Exhibit 2: TPI types Types of TPI Description Broker consultants Research and present offers from a range of suppliers to the consumer. Consultants are similar to brokers but may also provide information on energy efficiency measures. Sales supplier Companies may be employed directly with the sole interest to represent the supplier to the consumer. Some agents work for a single supplier, whereas others may represent multiple suppliers. Price comparison website Service to help consumers search and compare energy deals online. Bundled services providers Offer consumers multiple services. The bundles may not necessarily be limited to energy services. Umbrella/franchise sites Organisations that operate under a large brand name (not their own). Aggregators Companies who manage or work with a number of third parties for arranging energy contracts for a volume of consumers. They may also interact with consumers as a TPI. Energy advice companies Offer energy advice to consumers. Source: Ofgem Energy services market consolidation The majority of contracts in the non-domestic energy market are facilitated through TPIs and Ofgem estimates that over 1,000 TPIs are currently active in the non-domestic market although many are sole traders. The barriers to establishing a small TPI are relatively low, particularly servicing a small number of clients with fixed-term contracts. However, barriers to entry rise rapidly for those wishing to offer a variety of contracts including risked management contracts and a range of other energy services. We believe that the market evolution will favour those TPIs that are able to offer a more sophisticated service and the market has been characterised in recent years by a number of significant acquisitions designed to bolster market positions and extend the range of services. The table below lists some of the recent acquisitions in the energy procurement and wider energy services market. This is a trend that we expect to continue. Exhibit 3: Recent deals in the energy services sector Year Deals 2011 Schneider buys Summit Energy, Balfiour Beatty buys Power Efficiency, Charterhouse buys ERM 2012 Mitie buys Utilyx, Schenider buys M&C, Melrose buys Elster, WHEB Partners buys WEMS 2013 Vitruvian buys Inenco, Schneider buys Invensis, Utilitywise buys EIC, EON buys Matrix Source: Edison Investment Research, Inspired Energy The largest players in the energy procurement market are currently companies such as Utilitywise, Inenco and Schneider Electric and we believe Inspired Energy would rank as a top 10 player. In total Ofgem believes that the market represents some 200m in terms of fee opportunities, although anecdotal industry comments suggest that this is a conservative estimate. Anecdotal industry estimates are for c 2.5m non domestic energy contracts of which SME contracts comprise the bulk of the total number although a smaller percentage by volume. Based on Ofgem s estimate of market Inspired Energy 8 May

6 size, and with forecast revenue for 2014 of 10m, Inspired Energy would have a market share of c 5%. However, based on Inspired Energy s total number of contracts of c 11,100 it would achieve a market share of less than 0.5%. The UK energy market opportunity Although not at the levels seen at the peak of the commodity market, wholesale prices of electricity and gas have risen in recent years. The outlook for key commodity market suggests that prices are likely to remain high. DECC, in its Updated energy and emissions projections 2013 (reference scenario) projects 2020 commodity prices, in 2013 prices, of c $108/bbl for oil, c 65p/therm (winter 14/15) for gas and $123/tonne for coal. DECC s projections compare to current prices of $106/bbl, 55p/therm and $77/tonne. As a significant component of the gas and electricity prices relates to wholesale costs (c 40-50%) we would expect this to translate into higher energy costs for businesses. Although demand growth is likely to remain subdued, thanks to increased focus on energy efficiency initiatives, tighter capacity margins in the UK power generation market and the cost of incentives for renewable generation are expected to lead to higher pricing. Projections made by DECC (Estimated impacts of energy and climate change policies on energy price and bills, March 2013) also suggest pricing pressure is likely to persist. Gas prices are seen rising in real terms from 37/MWh in 2013, to 39/MWh in 2020, and for electricity from 106/MWh in 2013, to 135/MWh by 2020 for medium-sized business customers. Rising energy costs for businesses are likely to lead them to focus greater attention on cost effective energy procurement and the potential for energy saving initiatives. In our view this background is likely to favour TPIs such as Inspired Energy that can offer cost savings on procurement and advice on energy efficiency. Regulation As part of its Retail Market review, Ofgem developed a draft code of practice for non-domestic TPIs, setting out standards for TPIs in their relationship with customers, including professional and honest behaviour, transparency of information and effective monitoring. In November Ofgem also gained new powers under the Business Protection from Misleading Marketing Regulations (2008) to help regulate TPI activity. On 14 February 2014, Ofgem issued a consultation paper with proposals for the regulation of non-domestic TPIs. The document considers four possible regulatory frameworks to support the draft code of practice: maintaining the status quo, introducing a voluntary code of practice, code of practice underpinned by licence condition on suppliers to work only with TPIs accredited to the code and finally direct licensing of TPIs. At this stage Ofgem favours the third option, although consultation on the proposals remains open until 9 May We believe an operation of Inspired Energy s scale will find it easier to comply with a formalised code of practice than some smaller market players. Product and service offering underpin growth The breadth of Inspired Energy s service offering has expanded in recent years and the current range of services can be seen from the table below. Inspired Energy 8 May

7 Exhibit 4: Inspired Energy s service offering IE services Description Energy procurement Inspired offers three types of contracts for its customers, fixed, flexible and risk managed. Inspired Energy s largest customers typically take risk managed contracts Market analysis Provision of market intelligence to customers either as a standalone service to support clients that want to manage their own trading or as part of a procurement package Historical audits On request bill checking and monitoring of correct charging. If errors are found IE will manage the recovery. Audits are carried out free with IE taking a share of any recovery Bureau services Validate utility invoices and ensure clients are being charged correctly. Where errors are identified, Inspired Energy can leverage its supplier relationships to deal with errors. Energy management Energy engineers provide energy efficiency advice for businesses to help reduce costs, comply with legislation and track carbon emissions Renewable energy projects Inspired advises clients on the establishment of renewable energy projects including ROC certification Ofgem compliance and PPA negotiation Source: Inspired Energy As we have already outlined, the majority of Inspired Energy s revenues are derived from energy procurement contracts. Inspired Energy offers flexible and risk managed contracts to its larger corporate clients via its corporate division (including the old DEP business). The SME business, which started trading in 2012, and offers fixed contracts to smaller corporate customers via its EnergiSave business. The average length of the contracts is c 19 months, although contracts typically last anything between 12 and 36 months. The corporate business is the historic core of Inspired Energy s operations and it still delivers the majority of group profits. As we have seen, the business has grown significantly in recent years and the continued growth in the order book indicates that this trend is likely to persist. The SME business is of more recent origin but has grown rapidly since inception and delivered profits in Growth in the SME division is driven largely by the number of sales consultants and Inspired Energy believes that it has an opportunity to grow this part of its business rapidly and is targeting an increase in consultant headcount of around two a month during Once a consultant joins Inspired Energy they undergo a period of classroom training and on-the-job supervision lasting around five months before they achieve average revenue generation. The SME business has different characteristics to the corporate division and the gross margin is significantly lower than that achieved in the corporate business as consultant headcount is charged to the cost of sales line. In common with industry practise Inspired Energy recognises the majority of revenue (c 90% in this case) related to SME contracts when the contracts commence, although payment will be received spread across the life of the contract (exact timing will be dependent on the supplier). Accordingly we expect the growth in the SME business to lead to a rise in accrued income over the next couple of years. The table below shows the product offering of each business unit and its average contract size. Exhibit 5: Product offering and contract value by business unit IE Services Corporate SME Contracts Fixed price contracts Flexible contracts Risk management Additional services Administrative support Bill validation Retrospective audits Average annual value of contract ( ) 4, Source: Inspired Energy Outlook With a backdrop of rising energy bills we believe that the prospects for growth will remain favourable for TPIs, such as Inspired Energy, that can offer energy procurement savings and a range of other energy management and efficiency solutions. We see few constraints to this growth Inspired Energy 8 May

8 potential in the short term. Inspired Energy is located on a business park that affords room for expansion and according to the company it encounters little difficulty in hiring consultants of an appropriate calibre to drive growth in the SME business. IT systems are vital to facilitate business growth and Inspired Energy has made significant investment in IT systems in recent years. We expect this investment to continue, but importantly Inspired Energy believes the business has the capacity to expand to twice its current size before a new system would be required. While it is true that competitive pressure is increasing and there are larger market players than Inspired Energy, such as Utilitywise, Inenco, and Schneider, we believe that the market remains sufficiently fragmented and presents sufficient opportunities for growth to enable Inspired Energy to continue to grow its business both organically or through acquisition as a consolidator in a fragmented market. Strategy Inspired Energy s business strategy is focused on four areas: customer services, product innovation, customer diversification and acquisitions. We believe that the fragmented TPI market offers the prospect of potential acquisitions, while Inspired Energy s current financial situation should allow it to capitalise on any opportunities. Acquisitions can facilitate both customer diversification and product development alongside any organic initiatives. Customer service remains a high priority for Inspired Energy ensuring not only product development but also quality of service delivery. To facilitate customer service improvements additional staff have been recruited ensuring that clients of its IES and DEP businesses benefit from a single point of contact across the life of their contracts. Inspired continues to develop new products both in terms of energy contracts and additional services saw the introduction of the multi-customer management solution, providing smaller customers the benefit of aggregating demand, leading to economies of scale with improved wholesale energy pricing and load smoothing (avoiding costly peak pricing). Recently developed services include, advice on energy trading, water audit and procurement and European contracting. In 2012 Inspired Energy completed the acquisition of DEP (see below) and recently acquired KWH Consulting and SBE, and it continues to explore potential acquisition targets. In particular Inspired is focused on businesses that offer additional technical or service capability, sector specialism or product, customer or geographical diversification. Acquisitive growth So far Inspired Energy s acquisitions have been focused on the UK and we expect future acquisitions also to be located in the UK. In April 2012 Inspired Energy announced the acquisition of Direct Energy Purchasing (DEP) for 4m, including two deferred payments of up to 1m each. Should Inspired Energy end up paying out the deferred consideration in full, the multiples will represent 3.3x sales and 5.7x PBT. Based in Bolton, DEP offered services including energy procurement, bureau services, bill validation and project management to large multi site corporate customers. At the time of acquisition, DEP served 68 clients, claimed a retention rate by value of 90% and had an order book of c 1.7m. As well as providing economies of scale, the DEP acquisition provided Inspired Energy with knowledge and expertise in parts of the market where it lacked expertise, including the provision of contracts for large multi site energy contracts with a particular focus on the healthcare and speciality retail sectors. In March 2014 Inspired Energy acquired two businesses, Simply Business Energy (SBE) and KWH Consulting (KWH), bolstering its presence in the SME market. Inspired Energy paid 0.25m for KWH and issued 2m shares to SBE s owners with the possibility of additional deferred consideration in the case of KWH of 0.05m and 0.3m for SBE. The key attraction of SBE is its automated online operational quotation system, which will enhance Inspired Energy s offering in the SME market and replace its internal pricing matrix. KWH will bring operational experience of Inspired Energy 8 May

9 running an umbrella broker scheme for British Gas. Founders of SBE Steve Fletcher (former managing director of Npower and Bizzenergy) and Paul Fox (also of Npower and Bizzenergy) will join Inspired Energy. We do not expect additional acquisitions in the SME market, but acquisitions that add to Inspired Energy s product and service range or geographical coverage remain likely. Management The board of five contains two non-execs including Non-executive Chairman Robert Holt. The management team is unchanged since the flotation on AIM (November 2011) and founder of Inspired Energy, Janet Thornton, remains on the board as managing director. Matthew Thornton, who has been with Inspired since 2002, is sales director. The management team retains a significant stake in the business and there are in addition c 24m options outstanding. David Foreman and Michael Fletcher, who serve as FD and NED respectively, are also founders of Praetura Capital, which still holds 8.7% of Inspired Energy s equity and was involved in the flotation of Inspired Energy on AIM. Sensitivities Key personnel The loss of key staff constitutes a significant risk for Inspired Energy. However, management remain closely tied into the success of the company. Janet Thornton and Matthew Thornton retain 17% each of the company s shares. There are c 24m options outstanding. Acquisition Part of Inspired Energy s strategy is to grow through acquisition and while the market for TPIs remains very fragmented, presenting significant opportunities for acquisitions, as with all acquisitive companies there is a risk that Inspired Energy overpays for any acquisition. Competitive pressures Although the market for TPIs is fragmented, it is undergoing a process of consolidation, which is likely to lead to intensified competition and which could undermine growth prospects. Regulation Although Ofgem is currently consulting on new proposals for the regulation of the TPI market we do not believe these proposals will have an adverse impact on IE s business development. In the event that Ofgem s current proposals once enacted are perceived not to be working properly, further tightening of the regulation could constitute a risk to IE s business. Valuation To provide a guide to the potential valuation of Inspired Energy we have considered a range of potential approaches including peer multiples, PEG ratios, transaction multiples and a DCF. We calculate the valuation using both our base case forecasts, using corporate order book sales of 8.8m for 2014 and rising at c 2% pa thereafter and a bull case forecast based on c 20% growth in order book sales for the next two years (as has been achieved in the last two years) then rising by 2%. Using the more bullish scenario has a significant impact on long-term profitability, with 2020 EBITDA of c 7.3m under the base case scenario but 11.0m using more aggressive assumptions. At a price of c 14p/share Inspired Energy stands at a 2015 P/E multiple of 14.3x using base case EPS (0.95p) and 11.7x using more aggressive assumptions (EPS: 1.15p). Using static multiples does not capture either the high returns being achieved by Inspired Energy (projected ROIC over c 60%) or the high-growth nature of Inspired Energy s business. We believe that price/earnings to growth (PEG) ratios provide a more meaningful guide to valuing Inspired Energy s growth. We prefer to use historic P/Es in order to avoid double counting growth (reflected in the forward P/E ratio and the earnings growth forecast). We also prefer to use multi-year growth forecasts. Inspired Energy 8 May

10 Exhibit 6 shows that the All Share Index trades on a PEG ratio of 1.13x (two-year forecast growth, trailing P/E), while the support services index trades on a PEG ratio of 0.84x. Aligning Inspired Energy s PEG ratio to that of the All Share produces a valuation of c 13.5p/share using base case forecasts but c 22p using more aggressive assumptions. It should also be pointed out that Inspired Energy currently earns returns on assets significantly higher than the All Share average. There have been a number of transactions in the TPI market against which to benchmark Inspired Energy. Acquisition multiples for smaller companies have been modest but acquisitions of larger companies have taken place at much higher multiples. MITIE paid more than 10.5x historic EBITDA for Dalkia and 9.5x for Utilyx. Schneider Electric also paid 10x EBITDA for M&C Energy. Last year Vitruvian Partners acquired Inenco from EnServe and although financial details were not released, press comment (Financial News) indicted that this transaction also took place at c 10x EBITDA. However applying a 10x multiple to our forecast EBITDA would indicate a valuation of c 10p/share. Exhibit 6: PEG ratios Company Share price P/E historic P/E FY1 P/E FY2 CAGR 2 year Trailing PEG 2 year Forward PEG 2 year Inspired* % Support Services % FTALLSH % Source: Bloomberg, Edison Investment Research. Note: Prices as at 8 May 2014 *using diluted earnings We have also constructed DCF (out to 2020). As can be seen from the table below, using the base case scenario, the current share price of c 14p implies a discount rate of c 8.5% and a perpetuity growth rate of c 2%. However, the valuation is sensitive to assumptions on discount rate and perpetuity rate applied. Using the more aggressive assumptions, a discount rate of 11% and no perpetuity growth is required to produce a share price of 14p. Exhibit 7: Inspired Energy DCF sensitivities (base case assumptions - p/share) Discount rate 5% 6% 7% 8% 9% 10% 11% Perpetuity 0.0% growth 1.0% rate 2.0% Source: Edison Investment Research Financials Revenue We are forecasting revenue of 9.8m for 2014 and 11.8m for 2015 based on expected annual order book sales of c 9m and a growth in the corporate order book from 11m as at 31 December 2013 to 12.7m by 31 December 2014 and 13.5m by 31 December Gross profits and EBITDA We expect gross margins for the corporate business to remain above 90% in 2014 and Margins in the SME business are a function of consultant costs and we expect lower margins in this business of between 50-55% for 2014 and We expect EBITDA of 4.4m in 2014 and 5.4m in 2015 before 0.2m of share payment costs in each year. Dividend Inspired announced a dividend of 0.17p/share for 2013 and describes its dividend policy as progressive. We are forecasting a payment of 0.20p for 2014 and 0.23p for 2015 resulting in dividend cover (diluted basis) of over 3x in each of the next two years. Capex We assume capex (tangible and intangible) of 0.35m for each of the next two years. Cash flow We expect 2014 will be a year when heavy demand will be placed on cash flow from tax payments and deferred consideration. As a result we expect only a modest decline in net debt to c 2m in 2014 before moving into a net cash position in Inspired Energy 8 May

11 Exhibit 7: Financial summary '000s e 2015e 31st December IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 5,261 7,618 9,794 11,781 Cost of Sales (284) (1,009) (1,910) (2,373) Gross Profit 4,977 6,609 7,884 9,408 EBITDA 2,641 3,549 4,404 5,395 Operating Profit (before SBP, amort. and except.) 2,608 3,499 4,347 5,328 Intangible Amortisation (793) (948) (516) (292) Share based payments (212) (212) (212) (212) Exceptionals (429) (359) 0 0 Other Operating Profit 1,173 1,980 3,619 4,823 Net Interest (282) (234) (278) (257) Profit Before Tax (norm) 2,325 3,265 4,069 5,071 Profit Before Tax (FRS 3) 890 1,746 3,342 4,566 Tax (251) (324) (621) (849) Profit After Tax (norm) 2,074 2,941 3,449 4,222 Profit After Tax (FRS 3) 639 1,422 2,721 3,718 Average Number of Shares Outstanding (m) EPS - normalised (p) EPS - normalised and fully diluted (p) EPS - (IFRS) (p) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 3,091 2,630 3,231 3,216 Intangible Assets 2,893 2,333 2,697 2,605 Tangible Assets Investments Current Assets 3,508 4,299 5,715 8,192 Stocks Debtors 2,438 3,369 4,331 5,210 Cash 1, ,383 2,983 Other Current Liabilities (2,936) (2,636) (1,524) (1,705) Creditors (2,412) (1,936) (1,000) (1,055) Short term borrowings (524) (700) (524) (650) Long Term Liabilities (3,256) (2,734) (3,352) (2,574) Long term borrowings (2,372) (2,357) (2,824) (2,174) Other long term liabilities (884) (377) (528) (400) Net Assets 408 1,559 4,070 7,130 CASH FLOW Operating Cash Flow 1,195 2,795 2,657 4,444 Net Interest (282) (234) (278) (257) Tax (414) (768) (621) (849) Capex (266) (526) (345) (345) Acquisitions/disposals (845) 0 (830) 0 Financing 729 (917) Dividends 0 (650) (740) (870) Other Net Cash Flow 116 (301) 162 2,123 Opening net debt/(cash) 2,102 1,825 2,126 1,964 HP finance leases initiated Other 160 (0) (0) 0 Closing net debt/(cash) 1,825 2,126 1,964 (159) 9999Source: Edison Investment Research, company accounts Inspired Energy 8 May

12 Contact details Inspired Energy Plc Orders Lane, Kirkham Lancashire United Kingdom Revenue by geography CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS e 49.9% ROCE 14e 75.9% Gearing 14e N/A Litigation/regulatory EPS e 17.2% Avg ROCE e N/A Interest cover 14e N/A Pensions EBITDA e 56.1% ROE 14e 84.7% CA/CL 14e 3.7x Currency EBITDA e 23.3% Gross margin 14e 80.5% Stock days 14e N/A Stock overhang Sales e 66.6% Operating margin 14e 44.4% Debtor days 14e 161 Interest rates Sales e 24.4% Gr mgn / Op mgn 14e 1.8x Creditor days 14e 24.2 Oil/commodity prices Management team Chairman: Robert Holt Chairman Robert Holt is also chairman of Mears Group, non-executive chairman of Green compliance plc and director of a number of other businesses. Mr Holt has been active in the support services sector since the early 1980s in both financial and general management roles. Non-Executive: David Foreman David Foreman qualified as an accountant with KPMG and was subsequently an assistant director at Altium Capital. In 2011 David Foreman co-founded Praetura Capital LLP, which holds 8.7% of Inspired Energy. David also acts as CFO on a part-time basis N/A Managing Director: Janet Thornton Janet Thornton founded Inspired Energy in 2000, following a career with a number of energy consultants, and has led the business since. Janet continues to manage the company and has a particular focus on supplier relationships and product development. Janet also negotiates contracts for significant energy users. Sales Director: Matthew Thornton Matthew Thornton joined IES in In 2005 Mr Thornton established the risk managed division of the business focused on Inspired Energy s larger clients including Bombardier and Brenntag. Principal shareholders (%) Janet Thornton 17.2% Matthew Thornton 17.2% Isis Equity Partners LLP 11.8% Praetura Ventures 8.7% David Waite 6.5% Octopus Investments Limited 6.1% Companies named in this report Energy Assets, Management Consulting, MITIE, SMS, Utilitywise Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority ( Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. 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