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Business built on water heaters trading near six-year high

EnerCare Inc.’s battle to retain business in its core water-heater rental business appears to be paying off as the stock trades near a six-year high and some analysts call for more growth ahead.


EnerCare Inc.'s battle to retain business in its core water-heater rental business appears to be paying off as the stock trades near a six-year high and some analysts call for more growth ahead.

Shares of the Toronto-based company, which co-owns the second-largest portfolio of residential water heaters in Canada, are up 30 per cent over the past year alongside an increase in both revenues and profit.

EnerCare has cut its customer attrition rate in half, to 4 per cent in 2013 from 8 per cent in 2009, driven by a campaign against what it calls "aggressive and deceptive" door-to-door water-heater rental sales from some competitors. EnerCare is also expected to benefit from a bill passed last fall by the Ontario government to curb these same doorstep practices, after policy-makers received numerous complaints from consumers.

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Analysts say those measures, alongside EnerCare's growing submetering business that gauges electricity, water or gas usage in condo and apartment buildings, make it an attractive bet for investors.

"Everything is going in the right direction for them," said Jacob Securities analyst John McIlveen, who has a "buy" on the stock and a $12.40 price target.

The company also pays an attractive and growing monthly dividend, which currently pays 72.5 cents a year and yields about 6 per cent.

EnerCare shares hit $12.10 on Friday, their highest point since 2008, when it was known as Consumers' Waterheater Income Fund, before converting to a corporation in 2011.

TD Securities analyst Damir Gunja raised his price target last week to $15 from $12.40, saying in a note that its valuation has "room for multiple expansion."

His comments came after Just Energy Group Inc. said it sold its water heater business to Reliance Comfort LP for $505-million. Analysts say that price should help to boost EnerCare's valuation. It also removes a competitor since Reliance is the largest player in the Ontario market. EnerCare stock has risen about 5 per cent since the Just Energy sale was announced June 5.

"It shows there is an appetite for these types of assets," said National Bank Financial analyst Jeremy Mersereau, who has an "outperform" on the stock and a $13.25 price target. He believes EnerCare could be a takeover target in the coming years, possibly from a pension fund or private equity player looking for a stable cash-generating business.

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About 63 per cent of EnerCare's revenues come from its rentals business, which includes water heaters as well as heating, ventilation and air conditioning (HVAC) equipment to single-family homes. About 92 per cent of those are from co-owership agreements with Direct Energy Marketing Ltd., where EnerCare receives 65 per cent of the revenue.

EnerCare's submetering business accounts for the other 37 per cent of its revenues. The company, which supplies, installs and monitors the meters, has several competitors in the business, among them Carma Industries Inc., Wyse Meter Solutions Inc., and certain local utility distribution companies.

Among six analysts that cover EnerCare, three have a "buy," while three have a "hold" or equivalent rating.

One risk for the company is a potential slowdown in the condo market, which could reduce growth in its submetering business, notes RBC Dominion Securities analyst Nelson Ng, who has an $11 target and a "sector perform" on EnerCare, which is similar to "hold."

Scotia Capital analyst George Doumet recently raised his target to $14 from $12, citing the lower attrition levels in the water heater business. However, he maintained "sector perform" rating, saying he wanted to see more traction in the submetering division.

Desjardins Securities analyst Chase Bethel has a "hold" on the stock and $11.50 price target. "We recommend that investors await a better entry point before initiating or adding to positions," he said in a note.

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