WATR-is-a-going-ona-heh?
Q1 update at Water Intelligence
Caro lettore,
Despite having a “solid” Q1, Water Intelligence remains depressed. Its stock price is depressed I mean. Water Intelligence plc (AIM: WATR.L) is a US and UK provider of precision, minimally-invasive leak detection and remediation products and services for both potable and non-potable water.
I covered WATR in WAT-R Stock! at February’s trading update, so while it’s up 10% since then, today I’m going to focus on flow.. news flow.
There are three aspects to consider: two transactions and their 1Q24 update:
Reacquisition of the Fresno, California Franchise:
Water Intelligence has reacquired its franchise in Fresno, California. The purchase price of $2.9 million in cash will be spread over two years and includes all necessary assets for operations, including trucks and equipment. The initial payment of $2.0 million is due immediately, with an additional $0.9 million payable on the first anniversary of closing. This transaction is accretive for the Group’s shareholders say WATR.
Fresno, a rapidly growing city in central California, is strategically positioned in the heart of US agribusiness. The demand for water-saving solutions is strong, especially given changing climate conditions. Water Intelligence aims to leverage proprietary technologies, such as ALD’s Ditch Liner and Pulse offerings, to accelerate growth in this region.
Dusting off my WATR profit calculator to swallowing up your Franchisees:
What marginal management fixed cost? -A = $0m (Existing Management in CA)
What current sales? 22.25% of B ($1.8m) = $0.4m (22.25% is the difference between average “direct” margin vs the franchise royalty fee)
What upside service performance? 10% of C = $0.2m (Synergies in CA)
What upside product performance? D = $0.4m (Agribusiness rich pickings)
Cost of acquisition: -E = $2.9m (As reported)
Cost of Debt, if relevant: F = 8% of E (assuming zero)
Assets G = $0.5m (offsets against price)
(B+C+D-A)/(E+F-G)
$0.4m+$0.2m+$0.4m
$1.0m/$2.4m
So I estimate Fresno is being bought at a PE of 2.4 based on direct sales at 29% less the 6.75% franchise margin will drive $0.4m a year plus the synergies mentioned of Fresno being part of a cluster will drive $0.2m a year, plus I believe $0.4m of Intelliditch and Pulse sales can be achieved - probably more in time. That $1m is then divided by $2.9m less the assets acquired.
Sale of a New Franchise in Albany and Saratoga, New York:
Water Intelligence has sold a new franchise in Albany and Saratoga, both key cities in upstate New York. Albany, the state capital, and Saratoga, known for horse racing and wine growing, are part of the Capital District.
ALD’s national partners, including insurance and property management companies, have shown interest in ALD’s national brand and high-quality solutions for this region. The upfront consideration for launching this territory is $0.1 million, with royalty income expected from sales starting in July after training.
Water Intelligence sees further growth opportunities in upstate New York, including cities like Buffalo, Syracuse, and Rochester. More franchises to follow?
Assuming $0.4m of sales in 2024 and $1.2m in 2025 and $2m 2026 this will deliver (at 6.75% royalty) $127k income in 2024 and $81k in 2025, and $135k in 2026 to WATR. Since this is another agricultural area (wine growing) I am also optimistic for product sales.
Executive Chairman Dr. Patrick DeSouza expressed enthusiasm about these transactions, emphasising their contribution to sustainable organic growth. The franchise reacquisition in Fresno taps into the strong demand for water savings in US agribusiness, while the new franchise in Albany and Saratoga provides a launch point for expanding services throughout upstate New York1.
3. Q1 Results and forecast 2024
PBT for Q1 year on year rose 14% to $2m and EBITDA margins at 17% are higher too.
Annualised $8m PBT compares to a market cap of $80m, giving a PE of 13 (on a PAT basis) but given Fresno and Pittsburgh acquisitions adds a forecast $1.2m. The national insurance contracts and observed growth levels in Q1 of 6% annualised suggests a 2024 outturn of +$4m turnover which should translate to over $0.5m PBT growth (using 17% margin less 25%) placing this at $9.7m PBT and a PE of 11 (PAT).
But given the sales, service and automation benefits of the Salesforce platform, the new Intelliditch and Pulse products, the political importance of addressing sewage in the UK, the national insurer deal (where stats show 1 in 60 home owners on average have a water-related claim each year), the importance of dealing with too much/too little water 6% growth is arguably pessimistic. 1 in 60 is 5m Americans dealing with a water leak each year. Even before considering property damage leaks lose 4 trillion litres in the US costing $0.8bn - $3.8bn in water charges. About $120m of sales in 2023 were services (via Franchisee or via ALD). Assuming a $1k service cost that’s just 120k people - that’s 2.5% of the 5m Americans each year with leaks. Incredibly, WATR hasn’t yet reached 97.5% of the US market.
It is notable going back to 2022 and 2021 that WATR’s sales growth rates were far higher than the 3%-6% observed now. It’s not clear what caused the deceleration and the broker reports going back to that time don’t appear to discuss this either.
It is also notable that Franchise Income was $1.9m in Q1. At a 6.75% royalty rate that equates to $28m of services in Q1 which is $112m annualised for 2024. That compares to $94m in 2023 which would be a 16.5% growth rate.
Conclusion
Between Arqiva (owned by DGI9), WATR and Jupiter Green I’ve inadvertantly ended up with more fingers involved in water companies than little Dutch boys proximate to dams.
I find WATR an impressive business in the way their engineers can detect a leak (or maybe I’m easily pleased) - their people appear to be a USP as well as being a national US brand (with a lesser known UK brand), as well as the water management products they sell.
I don’t believe people “get” the reacquisition model - in fact I know they don’t - reading chat rooms but also listening to analysts speak of WATR. But the results are there and it is a nice model with a highly attractive PE (“it is accretive” as WATR themselves say).
In terms of valuation Dowgate valued WATR at £14.25 back in 2022, then £10 now £8 a share (but don’t reveal their methodology). WH Ireland speak to a historical 20X PE versus 12X currently.
My own sense on WATR, comparably, is the profits will grow faster and the multiples will expand slower. $9.7m forecast PBT ($7.4m PAT) profits on a 14X basis is a 25% upside from Friday’s 360p/370p bid/ask.
In addition, consolidation is not unusual in the world of water, and WATR at $80m is a tasty morsel with strong ESG credentials, for a water company, or in fact perhaps acquisition by an insurer? My washing machine insurer is also the folks I call if my washing machine breaks down, so why not Building Insurance with Water Cover?
A buy out at 20X earnings or more is entirely possible. Any bid would need to be sufficient to persuade CEO Patrick DeSouza who holds 27.97% of the stock - which is enough to block any take over he deems undervalues WATR.
Regards
The Oak Bloke.
Disclaimers:
This is not advice
Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"