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Cut your bills: Invest in companies that help you save money
While average wages may have risen 3.6% last year in nominal terms, the rate of inflation as we exited 2021 was 5.4% and last month it accelerated to 5.5% so in real terms workers are actually less well off now than they were a year ago.
To make matters worse, the Bank of England has forecast inflation will top 7% in April before it starts to come down again. A large part of the increase is due to the lifting of the energy price cap, which could see dual-fuel electricity and gas bills double for some households.
In that scenario, are there any companies which can help consumers cut their bills while ticking ESG boxes by limiting energy usage and pollution and do they represent an attractive investment proposition?
THE SQUEEZE IS COMING
The UK retail price index is expected to shoot up this year as rents, food and energy prices combine in a perfect storm for consumers. The cost of renting is expected to rise by up to £1,000 or 8% in 2022 according to property rental portal Homelet, food bills have risen with food and non-alcoholic beverage prices up 4.2% in the year to December, and now petrol prices have hit an all-time high at an average of 148p per litre.
Domestic energy bills have already risen significantly in the past year with gas prices up 28% and electricity prices up 19% according to government figures.
However, earlier this month regulator Ofgem said from April it would remove the price cap on suppliers from its current equivalent annual level of £1,277 per year to around £1,970 per year meaning an unprecedented 54% jump in the average home energy bill.
Yet, because the employment market continues to strengthen, the Bank of England is set to continue raising interest rates with the market now discounting a rise of 0.25% next month and up to four further increases of 0.25% by the end of the year.
On top of these rate rises, consumers face an increase in National Insurance contributions from April and changes to income tax as well as the withdrawal of the £20 Universal Credit uplift, while council tax bills are also set to rise.
Energy efficient investing
Commitments made at COP26 make this a decade in which meaningful progress needs to be made on the road to net zero. The way we source and use energy is key. From an investment perspective, the transition to net zero creates powerful structural tailwinds for quality businesses across a range of related themes. These include firms associated with renewable energy as well as those making our energy use more efficient. It’s a theme we look to tap-into in our portfolio.
Take our built environment, currently only 1% of buildings are ‘net zero’ – that means there’s lots to do if we’re to limit global temperature rises in line with the 2050 targets. The drive for greater efficiency benefits companies like Schneider Electric – a global leader in buildings energy transition and automation.
Our role doesn’t stop when we invest in a company however, as although Schneider is a business with a natural orientation towards sustainability, they’re still a large industrial company with environmental and social impacts. We want to make sure that these are managed effectively, and we conduct active dialogue (engagement) with senior management around issues like climate change and how they monitor and reduce emissions from their operations.
GO-CO A NO-GO
Whereas in the past consumers could expect to fall back on price comparison websites such as Future (FUTR)-owned GoCompare and Moneysupermarket (MONY) to help them save on their bills, the spiralling cost of energy means many suppliers have removed their tariffs.
As a result, the GoCompare website openly admits ‘We probably can’t save you any money right now because there aren’t enough tariffs to compare. We hope we can help you save in the future – but we don’t know when that’ll be. If you go direct to energy suppliers’ websites you might find better deals.’
Where the sites may help save money is on car or house insurance and broadband deals, although prices for these services have generally been on a downward trend since the pandemic, especially car insurance as people used their cars much less due to government restrictions. Even with restrictions lifted, traffic volumes are well below 2019 levels.
From an investor’s perspective, Gresham House head of public equity Ken Wotton believes that despite the temporary disruption from energy prices, consumers will continue to use firms such as Moneysupermarket, which is currently trading at its lowest price to earnings valuation for several years with an inflation-beating 6.5% dividend yield despite its high margins and net cash position.
‘Moneysupermarket has a really attractive, low-cost customer acquisition engine in MoneySavingExpert, which it acquired a few years ago. Saving money is front of mind at the moment due to the squeeze on peoples’ cost of living’, and the site has a strong reputation for trusted expertise and advice argues Wotton.
The big oil and gas companies are apologetic about the rise in prices but aren’t about to disappoint their shareholders who are looking forward to large cash returns.
BP (BP.) posted a profit of $7.5 billion last year, its highest for a decade, while rewarding investors with $4.15 billion of share buybacks and dividends.
Shell (SHEL) recorded a profit attributable to shareholders of more than $20 billion last year, helped by the sale of its Permian basin assets, and said it would buy back $8.5 billion of stock in the first half of this year on top of its normal dividend distribution.
Both firms talk about the need to ‘incentivise’ greater investment in UK natural gas production and how they are spending heavily on alternative or ‘green’ energies, but the payback on these is much too long term to be of any help in cutting household bills for now.
Fortunately, there are a few quoted companies whose role is specifically to save households and companies money on their energy bills.
Working mainly in the public sector, including social housing, energy services firm Sureserve (SUR:AIM) designs and installs heating systems ranging from gas boilers to air source and ground source heat pumps.
There are around 4.1 million social houses in the UK and the market in energy services is worth around £1.9 billion every year, giving the firm plenty of headroom to grow.
Sureserve also installs other energy-saving measures like cavity wall and loft insulation and smart meters to maximise fuel efficiency and financial savings for its customers, who include homeowners and landlords as well as local authorities.
Lastly, the firm also provides energy, fire, electrical, and water and fire compliance services to schools and colleges, other public buildings and the industrial and commercial sectors.
Inspired (INSE:AIM) is a consultancy focused on the corporate energy market, in particular bigger users, advising them on how to get the best deals from their suppliers as well as how to consume less energy to keep their bills and their carbon footprint down.
Unsurprisingly, its energy optimisation business picked up momentum in the second half of last year and group revenues for 2021 were 48% higher than the previous year, most of which was due to organic growth.
As the firm says, the global energy crisis has made energy ‘a high-priority board level topic’ and it has been working flat out to help customers manage energy prices and reduce their usage.
Record high prices have led some customers to delay their contract renewals while others have moved to short-term contracts until there is more clarity. Once prices start to fall, the firm expects contract renewals and durations to increase which will benefit its energy sourcing business.
Another AIM-listed energy-saving firm is eEnergy (EAAS:AIM) which measures customers’ usage while helping them cut costs with its LED lighting solutions and encouraging them to switch to greener energy sources like on-site generation via solar panels.
The firm’s eLight LED lighting offering means no upfront purchase or installation costs, with the customer paying a monthly fee instead which reduces their working capital needs and gives them an instant saving.
In last month’s first half trading update the company posted a 44% jump in turnover and a 250% increase in forward contracted revenues as customers sought out its services.
Meanwhile, trading at its energy management business improved on the previous period and the company is pitching on its strongest ever pipeline of new business opportunities.
In terms of manufacturers who can help firms lower their energy costs, Spirax-Sarco (SPX) stands out for its steam systems and electric thermal energy management solutions although its shares aren’t cheap at 34.4 times forward earnings.
Customers around the world, from schools to hospitals and even gas and oil rigs, use Spirax’s state-of-the-art steam systems to increase efficiency, save energy and reduce costs, while power stations and big manufacturing plants making everything from paper to semiconductors use its heat management products to regulate temperatures and cut their energy bills.
REDUCING ENERGY LOSSES
Returning to the consumer market, we should flag stocks which make insulating products as no matter how good or efficient a boiler or heating system, if a house is poorly insulated it will leak energy and cost a fortune to heat.
New houses are generally more thermally-efficient than older properties, but the price of new houses is rising even faster than inflation so spending on wall and loft insulation is a good way for existing homeowners to reduce their energy bills.
SIG (SHI) is one of Europe’s leading suppliers of insulation, dry lining and roof covering, and has more than 400 sites across the UK and Europe making it a key supplier to builders’ merchants and the construction industry.
In its full year trading update last month the firm reported strong momentum exiting the year with 15% revenue growth in the second half driven by the UK interiors market.
Its order book is solid, and the firm has managed the well-documented supply chain issues and volatility in prices to make sure its customers get what they need.
Chief executive Steve Francis says he and his management team are confident the momentum built last year will continue through 2022 and the group will deliver ‘solid organic revenue growth’ as a result.
There are a few funds dedicated to investing in energy-saving technologies, the most notable being the SDCL Energy Efficiency Investment Trust (SEIT) which had close to £1 billion of assets as of September last year.
The company invests directly in large-scale projects which deliver cheap, clean, reliable energy solutions at the point of use, bypassing the grid. Typical examples are onsite power generation using combined heat and power units and roof-top solar installations, or energy reduction measures such as efficient lighting, heating and cooling systems.
Its portfolio is made up of a range of proven infrastructure projects delivering energy for commercial, industrial and public buildings in the UK, Europe and North America, with the aim of generating stable dividend income and an element of capital appreciation.
Disclaimer: The author owns shares in SDCL Energy Efficiency Investment Trust