WATR reports interim results this morning which reflect no slackening in the group's positive momentum, and which evidence again the effective business model. Adjusted PBT grew by a healthy 20% (statutory PBT growth of 33%), suggesting that the business continues to operate strongly and in such a way as to meet and exceed its targets again notwithstanding the challenges imposed on businesses generally by Covid. Within the overall growth momentum, both the franchise business and the Corporate division saw impressive margin gains, while franchise royalty succeeded in growing notwithstanding reacquisitions reducing the pool of franchises, a positive outcome. FY2020E forecasts are reaffirmed, although conservatively we leave them unchanged at this point. WATR is the only national US operator providing a leak detection service across the US, and this is a seriously large market – the insurance sector alone worth $US13bn p.a. above and beyond the traditional markets WATR has served. Now spanning clean and dirty water (Covid-19 opportunities), the company operates as an integrated entity and continues to generate new, value-added products. At current levels, we see significant upside to our 500p-plus fair value assessment, and note WATR's aspiration towards $US250m of underlying sales.
Companies: Water Intelligence Plc
Water Intelligence (WI) operates in a sizable and expanding market. The Group provides minimally invasive water leak services and is building a distribution platform to leverage its installed and growing customer base. The company is a designated Essential Service Provider during CV19 and expects to see increasing demand for its products as the Green Economy gains traction. WI's management has a proven track record of developing new revenue streams and the Group's core services are uncorrelated to either the geopolitical or economic climate. Management is selectively reacquiring franchises and converting them to corporate-operated locations. This converts indirect revenue to a direct, higher-margin income stream under the same brand, and results in improved profitability and significant earnings accretion. We believe the shares trade at a substantial discount to fair value and initiate coverage with a target price of 452p. Our scenario analysis on page 20 demonstrates that the shares could rerate at closer to 600p based on the Group's current reacquisition strategy
WATR is a leader, in the US and internationally, in precision and minimally invasive leak detection and repair in both drinking and waste water. This morning's announcement highlights a major success for the group building further on the strength of its insurance sales channel; we note that that business has grown nearly threefold since 2017. Today's agreement with a leading US insurance player is the fourth such agreement in succession, and we anticipate it will act as a further growth trigger for WATR's US business. Importantly, WATR remains the only national player to specialise in pinpoint leaks.
This morning's announcement from WATR again places the company's successful reacquisition strategy under the spotlight, with the Melbourne acquisition adding $AU250k of profits to the Corporate business and $AU1.29m revenues for less than a $AU1.8m purchase price. This latest reacquisition means that the group is keeping up the strong pace set earlier with the Maryland acquisition last month, following on from San Jose and Minneapolis in May and June respectively. It is also a reflection of the company's global approach. With strong technology and capabilities in the field of minimally invasive leak detection and remediation, WATR is able to benefit from drivers which go well beyond national frontiers, since water infrastructure challenges are well-nigh universal.
This morning's announcement from WATR showcases the company's effective reacquisition strategy whereby successful franchises are absorbed into the centre, and follows on from the Minneapolis and San Jose acquisitions, setting a rapid pace in 2020. WATR's reacquisition of the Maryland franchise is timely, given the cross-selling opportunities which exist for the group's new technologies, while the franchise itself is sizeable ($1m-plus revenues, c.$0.4m pre-tax profits) and earnings enhancing ($1.35m purchase price), although our forecasts are left unchanged at present. Covering the sizeable state of Maryland, the franchise is strategically positioned between the group's operations in North Virginia and South Jersey, and as such will benefit from both scale and the whole range of opportunities across the group's municipal, commercial and residential verticals, all in turn benefiting from insurance-related sales among other significant drivers.
FY19 explosion of activity on all fronts; well-positioned for Covid-19
FY2019 results from WATR this morning show all the divisions coming together to generate another excellent result, providing further substantiation for the well-calibrated business model. Overall revenue growth was strong at 27% YoY; even more punchy was the statutory PBT growth of 34% (adjusted: +34%), again showing the margin opportunity from increased efficiencies / utilisation. Layered within the overall growth achievement is the impressive performance of Corporate (+43% YoY revenue uplift including reacquisitions, but still double digit underlying), the success of B2B insurance (+41%) and the fact that franchisee royalties also grew at robust single digit rates notwithstanding reacquisitions reducing the pool of franchises. The update alludes to the challenges of Covid-19, but also the opportunities, and reaffirms FY20E forecasts (at a time when many, or most, forecasts have been withdrawn from the market). The only national player in leak detection, with a $US13bn-plus insurance market to go for in addition to its traditional markets, WATR is also more than this, offering an integrated service spanning clean and dirty water (hence the Covid-19 opportunities). Our Fair Value assessment is raised on the back of a new round of forecasts, cementing a significant value opportunity to the 500p-plus level.
Major reacquisition feeds WATR proactive growth trajectory, Q2 acceleration
WATR has announced the reacquisition of its highly profitable Minneapolis franchise, providing a base for its corporate division in the Upper Midwest and opening up new opportunities in an area where the group had already delivered significant workstreams in 2019. The deal is earnings enhancing ($US0.3m PBT p.a., acquisition price c.$US1.3m spread over four years), highly complementary and will drive cross-selling of the successful wastewater solutions to local leak detection customers. These solutions are highly relevant in the Covid-19 environment, and it is notable that far from being slowed down by the current situation, WATR, an “essential service” provider to homeowners confined to their homes, is seeing strong demand for these services and is looking to accelerate its growth trajectory in the second half. Recently, WATR further evidenced
its strong growth model, regardless of economic conditions, when it announced 36% PBT growth for FY2019E, followed by similar strong growth in Q1-20. Franchise reacquisitions form an important part of this model, since they enable the business to create efficiencies through centralised marketing and management, while adding local businesses which they already know very well to their corporate portfolio. Delivering in good times and bad, WATR is the only national player in leak detection, a strong position to feed its insurance-linked sales stream in a huge but unconsolidated market. We assess fair value at 500p for all these reasons and more.
Strong momentum with Q1 profits up 35%; comfortably in-line for the full year
A strong update from WATR this morning reinforces our fair value assessment of 500 pence with punchy revenue and profit growth continuing in Q1. The company expects comfortably to meet expectations for the current year, a rarity in the COVID-19 environment. This after WATR had already updated on an excellent FY2019E (PBT +36% YoY, both organic and acquired growth strong). Despite the YoY impact of reacquisitions, Franchise revenues still showed positive growth (+4%) while all the other areas grew double digit, with Corporate-Operated particularly strong at +29%. The wider backdrop of Covid-19 has prompted the company to accelerate innovative products which are relevant to public health issues arising during the crisis. A national player, WATR has already shown how it can piggy-back on major insurance streams of revenue, having in recent years started to tap into multi-billion $ sales which are available through major insurers. Our 500p fair value assessment is all the more pertinent given that the shares have fallen back as a result of broader headwinds while the company has continued to deliver in good times and in bad.
Caspian Sunrise (CASP) – Corporate – Operational Update
Market Cap £140m Share Price 7.7p
Caspian Sunrise announced that the Deep Well A5 sidetrack has flowed for a period of 40 days and management stated it continues to believe that the well is capable of producing at a rate of at least 1,500 b/d. The company is focusing on ensuring flow is maintained by adjusting the wells choke size to maintain a constant reservoir pressure. The company stated it is planning to optimise the well through an acid job later in February and that the operation is expected to take three days.
Watchstone Group (WTG) – Corporate – Pre-close trading update and planned capital return to shareholders
Market Cap £68.4m Share Price 148.5p
Watchstone has this morning released a pre-close update for the year ended 31 December 2019, as well as announcing a planned first tranche return of capital to shareholders by the end of June 2020, subject to approvals.
Water Intelligence (WATR) – Corporate – FY trading update ahead of expectations
Market Cap £44.2m Share Price 317.5p
WATR has published another strong update this morning, demonstrating that the company is able to generate strong double digit growth in revenues while at the same time expanding margins. FY2019E results are reported to be well ahead of the prior year on both the sales and the profit lines (+27% and +36% respectively), while no less than 9% ahead of forecasts. Showing again that the company is able to grow sales and margins at the same time, PBT margins are up >150 basis points, while operating margins in the key Corporate activity are at 13.5% (also +150bp).
Companies: CASP WTG WATR
Growth and value; adj. PBT +36% YoY, 9% ahead of views, delivering 1 year early
WATR has published another strong update, demonstrating that the company is able to generate strong double digit growth in revenues (+27%) while at the same time expanding margins, a winning combination. Both sales and profit growth outpaced expectations generously, with a 9% beat to our forecasts at both levels. Particularly pleasing are (1) the ongoing growth in franchisee revenues – despite reacquisitions, organic growth remains a significant feature, (2) corporate location revenue and margin growth, +44% including reacquisitions but double digit even if these are excluded, and (3) the B2B channel (insurance-led) generated a sparkling +41% increase in sales. WATR is rolling out a strategy which has had long gestation, featuring a nation-wide presence across forty-six US states, technical skill-sets, overseas expansion and, ultimately the huge drivers for saving water in the modern world (annual multi-billion $ domestic pay-outs by US insurers alone). Major entry barriers remain. The company is effectively delivering a year early. Given our 500p fair value, we see significant upside for the shares together with a significant buying opportunity.
Water-Intelligence Growth and value; adj. PBT +36% YoY, 9% ahead of views, delivering 1 year early
Water Intelligence (WATR) – Corporate – 10-month update reflects continuing good progress
The Pebble Group, a provider of products, services and technology to the global promotional products industry, announces its intention to seek admission of its shares to trading on the AIM market of the London Stock Exchange, which is expected to take place in early December 2019.The Group delivered revenue of £99.8m in the year ended 31 December 2018.No mention of bottom line and a suggestion that funds raised would provide an exit to private equity shareholders and the repayment of debt. Offer TBA.
Longboat Energy raising £10m at 100p. Expected admission November 2019. The company has been established by the former management team of Faroe Petroleum to create a new full-cycle North Sea oil and gas company .The strategy to achieve this will initially be through the acquisition of assets where the management team can add value through subsurface and operational improvements, follow-up deal opportunities and near-field exploration; and by value creation through the drill bit. Due 28 Nov.
MJ Hudson Group PLC, the financial services support provider to Alternatives fund managers and asset owners, is planning an AIM IPO. Deal details TBC but expected admission date mid-December.
Companies: GRP BSE SWG UJO VRS VEC PRES WATR
WATR has delivered as much in sales terms in the first three quarters of 2019 as it did in the whole year of 2018, putting on a 34% YoY growth sprint. Momentum in the individual businesses remains strong, with corporate-operated and franchise-related (mainly the insurance channel) revenues breezing forward by 47% and 45% YoY respectively. At the same time, pleasingly, the franchise division’s royalty income itself grew sales in spite of reacquisitions (+4%). This translates into approximately $67 million of gross sales and further opportunity for accretive reacquisitions. Our PBTA forecasts are reaffirmed at +24% for FY2019E, itself an impressive number while reinvesting for such strong revenue growth. The update highlights the huge opportunity for this business on the back of global as well as US demand for an answer to water loss from leaks and related issues such as lead in water and wastewater problems. With good progress from the International division (+27%), the business is operating well on an integrated basis; and looking forward, the company has commenced the roll-out of new proprietary wastewater diagnostics products with first sales expected before the end of the year. The valuation is underpinned as ever by the royalty stream combined in our Sum of the Parts methodology with other divisions to form our 500p fair value assessment.
With profits rising rapidly and the share price falling to an 18-month low, it is time to revisit this situation. Most recently, the company reported H1 profits equivalent to two thirds of FY expectations and 29% ahead YoY. The Corporate division growth driver lifted its revenues by 113%, reflecting the success of the company’s re-acquisition programme added on to 20%-plus organic growth. Insurance-related sales, a separate division, have grown five-fold in the last three years, and only represent a tiny fraction of the annual $US13bn bill the insurers have to pay for remediating water assets in the US - particularly pertinent given WATR’s position as a national player and the proven need of clients for a cost-effective and minimally invasive national service. The growing royalty stream underpins the valuation (Sum of the Parts basis), while as a dollar earner, the stock is a natural hedge at a time when the value of the pound has been falling. With a 500p estimation of fair value, we see significant upside from the current share price, as well as potential upside to forecasts in due course.
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Full-year results to 31 May 2020 deliver revenue of £15.0m (+10.3%) and EBITDA of £6.8m (+36.0%) as noted at the acquisition of Quantuma Advisory. We continue to believe a key value driver of owning K3 shares is an investor’s exposure to the positive disruption being wrought by the company’s model, which now has the ability to be applied to synergistic markets across the addressable professional services SME sector as a result of the two recent acquisitions. The already proven restructuring and insolvency practice specifically has the potential to deliver significant upside in the current environment. We reiterate our estimates, noting EPS growth of 63% between 2020A and 2023E. Target price remains 300p, offering 100% upside from the placing price of 150p.
Companies: K3 Capital Group Plc
FY20 results reflect a year of trading in-line with earlier expectations, until being significantly interrupted in Q4/20 by the impact of Covid-19. Despite this, 1pm remained profitable throughout, despite accepting forbearance requests and prudently lifting bad debt provisions for the future. Post-period, there has been a noticeable pick-up in trading as the UK economy recovers, which 1pm is currently positioning itself for. A P/TNAV of 0.55x materially undervalues 1pm, hence we remain at “Buy”.
Companies: 1pm Plc
H120 adjusted EBITDA of £9.1m was the main positive surprise for us in Ergomed’s full interim report released today. We have increased our adjusted EBITDA forecasts to £18.3m (up 8.6%) in 2020 and £20.1m (up 6.8%) in 2021. A strong order book (£151.4m, up 22.0% from the end of 2019) with high visibility into 2021, continued overall business growth and a strong balance sheet should allow Ergomed to successfully navigate the COVID-19 pandemic, invest in organic growth and look for potential strategic acquisitions. Our valuation is upgraded to £409m or 845p/share.
Companies: Ergomed Plc
Positive EBITDA in FY20A was a major milestone. Investment across the business is up and there is a clear strategy in place to deliver value for shareholders. The balance sheet is strong post the placing and the business is now self-sustaining. In light of this Rosslyn trades on an unwarranted discount to the software sector.
Companies: Rosslyn Data Technologies Plc
Keywords Studios has again showed the resilience of its model in H120, delivering 8% l-f-l revenue growth, 19% adjusted EBITDA growth and 17% adjusted EPS growth despite the impact of COVID-19. Adjusted EBITDA margins of 17.8% have held up better than we expected. Looking ahead, we see sustained industry growth, led by the console transition in Q420, with publishers increasingly recognising the resilience Keywords adds to their development processes. Following its third acquisition of the year, we see management once more focusing on M&A with net cash of €101m. Keywords’ strategy, which has delivered a five-year EPS CAGR of 42%, appears sustainable, with dividend payments to be resumed in FY21. As such, we believe that the shares remain set for continued appreciation.
Companies: Keywords Studios Plc
H1 was very challenging for NAHL due to COVID-19 but, demonstrating its resilience, the group remained profitable and free cash flow increased strongly. As a result, net debt reduced from £21.0m at December 2019 to £18.5m at June 2020. New banking covenants have been agreed and the £25m facility term extended by a year to 31 December 2022. Since the end of June the group has observed an increased demand for its services and, in August, personal injury enquiry volumes recovered to c.70% of prior year. While the potential for further lockdowns makes the short-term outlook uncertain, we continue to believe that with prudent management of short-term cash flow, NAHL can trade through the current challenges with its long-term potential undiminished.
Companies: NAHL Group Plc
Timing is everything when it comes to innovation. Too early, and even ground-breaking technology can struggle to gain traction. Too late, and the opportunity might be lost. A tricky balance. However for Rosslyn Data Tech, we think this ‘battle-hardened’, cash-rich (Est Apr’21 net funds of £6.1m) & now profitable SaaS firm is ideally placed to benefit from strong secular demand for its cutting-edge & fully integrated Big Data, AI, spend analytics, SMDM (Supplier Master Data Management) & customs/duty handling applications.
Driver Group has announced a strategic partnership with Africa’s leading claims and dispute resolution consultancy, EVRA Consulting (click here), which is headquartered in Johannesburg. The partnership combines Driver’s higher margin Diales services with EVRA’s relationships and network to bring the benefits of Expert commissions to clients across the African continent. The joint offering will give Driver access to 54 national markets across Africa. Additionally, the Group has strengthened its Middle East team, with the appointment of David Merritt, a well-known Quantum Expert with over 35 years’ experience in the construction and engineering sectors. Today’s announcement is in line with the Group’s strategy to expand its high margin Diales services, alongside diversifying into new geographies. Management guidance continues to be suspended and our forecasts therefore remain withdrawn.
Companies: Driver Group Plc
Following a number of recent contracts wins GYG’s order book now stands at record levels, which we believe should give investors confidence in current forecasts. We leave our published numbers unchanged at this juncture but believe our assumptions to be well underpinned by increasing trading momentum backed by the record order book, coupled with efficiencies and cost savings evident in the H1 margin trends.
Companies: GYG Plc
Frenkel Topping has acquired 6% of the share capital of NAHL and NAHL has confirmed that it has received an approach from Frenkel Topping proposing an all share combination. The Board of NAHL is considering the proposal. We move our recommendation from sell to neutral.
Open Orphan has announced that hVIVO has signed a new contract for an RSV human challenge study clinical trial with a top 3 global pharmaceutical company. The contract shows the Group's ability to convert the existing hVIVO pipeline and engage with the top customers in the industry providing great encouragement for investors in the medium term. Reiterate Buy
Companies: Open Orphan Plc
The Interims are as flagged in the July update; global lockdowns helped End User Spend (EUS) over the platform rise by 59% YoY to £743m. Encouragingly, the H1 revenue growth closely matched that rise; increasing 50% YoY, to a record £4.8m. With operational gearing in the platform, group profitability continues to rise rapidly as revenue grows; H1 adj. EBITDA of £1.1m, more than double the whole of FY 2019 earnings. The major deals delayed in FY 2019 also arrived in H1, for Platform and Bango Marketplace; notably, the purchase of a controlling stake in Audiens by Korean tech giant, NHN, assisting management focus while retaining a 40% stake in a business set to be boosted by funding and IP from its new parent. Operating activities were cash positive and capex was more than covered by an NHN investment, lifting net cash to £4.2m. This is an exciting year, with deals signed in H1 expected to help EUS reach £2bn in 2020 and leaving BGO on track to meet our FY forecasts of strong revenue growth and material profitability.
Companies: Bango Plc
Against a backdrop of global economic turbulence driven by COVID-19, Bango’s H1 20A results confirm robust growth in End User Spend (“EUS”) and revenues, alongside record EBITDA and a solid improvement in operating cash flow. Execution in the payments business remains strong, and growth in Bango Marketplace in our view demonstrates the group’s increasing traction in data monetisation. The outlook statement is positive, and we make no changes to underlying estimates following the announcement. Overall, we continue to believe that momentum remains strong, and that the group is well placed to deliver its FY 20E targets.
RBG Holdings had H1 revenues of £12.0m, up 17% against H1’19, of which £11.7m came from the Group’s law firm, RBL. On a LfL basis (excl. £2m of discretionary gains from litigation assets in H1’19), Group revenues were up c.46% YoY. EBITDA of £2.6m offers still-compelling margins of 22%. Transaction delays in Convex and a period of investment in LionFish held back ST performance for these higher margin divisions, yet pipelines remain healthy for Convex. Management is bullish on its ability in H2 to divest litigation assets in order to fund new investment, and in line with strategy. Continued uncertainty over timings around Convex transactions completing, and COVID headwinds, means we keep forecasts withdrawn, however suggest an intrinsic value of 90p is comfortably achievable for the shares.
Companies: RBG Holdings Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
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