Rodman & Renshaw: Allow For Lower Margin Customer Attrition In Just Energy Group

Rodman & Renshaw maintains its Buy rating on Just Energy Group Inc (NYSE: JE), saying that the stock is "undervalued" as the company is poised to benefit from its "strategy of allowing lower margin customer attrition."

Why Buy?

During the year ended March 31, 2016, the company lost about 166,000 residential customer equivalents (RCE), as it is allowing loss of lower margin customers to improve its gross margins.

Analyst Amit Dayal noted, "Customers added during the year contributed an average of C$207 to gross margin during FY2016 from C$191 in FY2015. Similarly, the gross margin per commercial customer added during the year was C$84 versus C$79 during that in FY2015."

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As of March 31, 2016, the company has added 60,000 customers for its bundled offerings, which include the flat-bill program, smart thermostats and the JustGreen program.

"These bundled offerings result in lower customer cancellation rates and contribute a higher margin per customer. We continue to monitor with interest the success of this strategy and shall do so over the next few quarters," Dayal wrote in a note.

Looking Ahead

For the year ending March 31, 2017, the company expects base EBITDA of between C$223 million and C$233 million. Dayal estimates EBITDA of C$219.4 million, which is slightly lower than the guidance, as the analyst is monitoring the progress of the company's strategy.

"We believe that with its growth and profitability focused initiatives, JE should be able to steadily grow at approximately 3.0 percent topline CAGR from FY2016–FY2020 and help JE reach Base EBITDA consistently above C$200 million — reaching over C$250 million in FY2020. As a result, we believe that the stock is currently undervalued," Dayal added.

At the time of writing, shares of Just Energy were up 1.82 percent at $6.14. Dayal has a price target of $10 on the stock.