**THIS ARTICLE HAS BEEN SUPERCEDED BY WATR LET DOWN**
Dear reader
I’m supposed to be a perma bull about all my OB25 for 25 ideas, ain’t I?
Well, here’s a break with tradition.
I was quite disappointed with the WATR update. Others seemed delighted and gave it a positive Green assessment. Pointed to the year on year. Up, up, up (and away). But my eyes were drawn to the implications of a poor Q4. That wasn’t green.
We were given several items of news:
A full year update (so in reality a 4Q24 update)
News of another two acquisitions
News of a partnership with StreamLabs
The Q4 Update
Perhaps WATR was “Inline with expectations” for the year but the October-December period is a disappointment. If we line up the numbers against Q3 we find Royalties down 20%, Franchisee Product income down 10%, International down 7% and ALD down 9% (despite the addition/acquisition of Dallas on the 9th November).
WATR said they want to list in the USA. I’ve got bad news. The Americans pore over quarterly earnings (as I have done) so US investors would expect the numbers to be presented in the manner I’ve produced below (to the extent that I can, based on the info provided). The numbers are not pretty and WATR, if listed in the US, would have tanked - in my opinion on the weak Q4.
The stand out performer is the International (UK/Ireland/Australia) division both on a Q-to-Q and Y-to-Y basis. Nothing was said about that in the interview with WATR.
Perhaps it was just an off quarter for WATR. Perhaps a one off. We also do know that the 1st half is always more profitable than the 2nd half (a reader said they thought this was due to the annual WATR conference and the costs of running that). But what concerns me is that Q4 SALES are down by double digits - not just profits.
Comments that revenue being up 10% misses the point (leaving Q4 analysis aside) that statutory PBT margin year-on-year is down from 8.2% to 7.6%. In a year when 3 franchises were acquired this should have boosted margin. After at least $15m spend on buying them out. Looking back we don’t even know how much Lafayette acquisition cost! But during 2024 we know the cost of the other two: Fresno ($2.9m) and Dallas ($12m) are almost $15m invested. To be fair, Dallas is recent but where is the benefit? Why do we see -8% quarter on quarter for ALD? We should be seeing an increase. That’s the whole point of acquiring franchises - it drives higher direct sales, plus higher margin sales. Plus product sales, and where’s the detail on those?
Stat vs Adjusted EBITDA/PBT
* Adjusted EBITDA and Adjusted PBT both adjusted for non-core costs and non-cash expense of share-based payments; Adjusted PBT also adjusted for non-cash expense of amortization.
More positively, it’s true that’s adj. EBITDA is up 12% y-o-y to $15m and that is a positive, although share-based payments are still a very real expense to the business so I prefer the statutory measure. Part of the “adjusted” is to ignore “non-core costs” which the British would call “Exceptional Costs” but these appear with regularity. There were around $1m of exceptions each year in 2023 and 2022 for tech upgrades, construction costs and legal costs. And $0.6m of share-based payments in 2023. In 2024 the prior year’s $1.6m adjustments grew to $2m in 2024…. so best not to ignore unexceptional exceptions, eh? As good as Salesforce is, you should assume further “one-off” tech expense in 2025 and beyond shouldn’t you?…. unless management definitively tell us otherwise…. but they don’t.
… yep, they tell us the opposite! :)
So a better measure is statutory EBITDA and it grew $1.2m from $11.8m to $13m which is 10% y-o-y up. However Statutory PBT grew $0.1m meaning that “ITDA” costs grew -$1.1m too, didn’t they?
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In fact considering the chart I produced on the 3Q24 results is helpful to understand the below trend 4Q24 performance. the 2H24 adj.PBT is $3.1m and has gone below the projected $4m (based on 3Q24 performance) and the “on trend” $3.5m (extrapolating 2021-2024). But 4Q24 is only one quarter.

ITDA
If we consider the “I” (interest) costs were -$1.64m in 2023 and my estimate is this is around the same in 2024. Debt was higher but interest rates lower. A lower 6.35% interest rate on average debt of up to $25.8m would be up to -$1.64m the same as 2023. I’d be very surprised if average debt were as high as that… so it’s unlikely to be higher “I” costs. Tax is 25% so an additional -$0.3m perhaps? So Depreciation/Amortisation must have grown -$0.9m. Either that or something else has sneaked into the “ITDA”. The annual report will tell us the facts.
Debt
We know that Debt was $23.6m at the end of September and WATR tell us it was 1.48x $15m = $22.2m at year end suggesting $1.4m of net debt reduction in 4Q24, which is good to see, although 1H24 was $8m op. cash flow before w/c. When we consider a $12m acquisition of the Dallas franchises occured in 4Q24 including $5m upfront paid to then reduce debt by a net $1.4m from 3Q to 4Q seems an astonishing party trick. $5m was paid up front and surely the remaining $7m must be part of the $22.2m debt figure at year end? It’s difficult to make sense of that debt figure. It appears to have reduced by $8.4m in one quarter?
Was Operating CashFlow suddenly a heck of a lot higher in 2H24, perhaps combined with strong working capital (WC) reductions?
Intelliditch/Versaliner
It make me chuckle that the frequently renamed offering for channeling water underwent a further rename. Now referred to in the RNS as the “Ditch Lining Water Management product”. Ironic to be ditching names for a ditch product.
Perhaps shareholders should be consulted on a better new name. Will Ditchy McDitch face win the day? Hurrah for Ditchy McDitch face!
ACQUISITIONS
Two more acquisitions include:
A further ALD franchisee (American Leak Detection) based in Georgia purchase for $3m. It made $1.55m sales and generated $0.55m profits. So that’s a -$.0.1m reduction of royalty (at 6.75%) and “usually” would be a 29% margin so a $0.45m margin. Its actual $0.55m margin suggests a higher than usual 35.5% average margin - about one quarter higher than the US average margin. Well these are “high-end homes”.
Assuming this can be maintained, then WATR have paid an effective 6.66X P/E multiple.
A plumbing business in Connecticut (acquired for $1.2m or 4x profits). A 4X P/E or if margin can be increased to the 29% average (from its historic 25%) then $0.35m profit means a 3.4X P/E multiple.
So long as acquired franchises can deliver synergies and growth the model is good. If they can deliver product sales they the model is amazing. But we have zero evidence whether this is happening (or not) in the trading update. That’s frustrating.
StreamLabs
Similar to how OB24 idea DGI9’s Arqiva holding has a SmartMeter product being rolled out across millions of UK homes so too do StreamLabs have a product. Depending on package it’s $389 - $1,665 to buy and then $60 a year and you’ll have an App that bleeps and alerts you to a leak. Prevention is better than cure, Mostyn!
A bit like how having a burglar alarm might save you insurance costs, so too might this. That appears to be the point of the constant references to Insurance.
Who are StreamLab?
There are no stats as to how large or small StreamLabs is today. In Chubb’s latest 2023 Annual Report it gets a brief mention under “Chubb Personal Risk Services” for high-net-worth folks in the US. But there’s no appreciable business unit.
Based on the StreamLab web site’s “community” page it only has “followers” in the single figures. So not very big based on that. Yes it’s owned by big ol’ Chubb and was acquired in 2021 and has been going since 2010 (15 years and over 3 years already under Chubb) and was founded in Australia. Over 3 years, so don’t get too giddy over this being Chubb, it appears there’s limited traction.
What type of customer would pay up to $2k (including est. fitting services) plus $0.5k a year. This is a high-end product isn’t it, for high-net-worth folk? For folks with not just a swimming pool, but a larger swimming pool. Even if there’s an insurance discount involved, I suspect that discount won’t appreciably cover the cost.
Or perhaps I’m misunderstanding the value and people’s propensity to spend on yet another gadget/service. Perhaps plenty will shell out the thousands for this having suffered the cost of leaks, even if it doesn’t appear they have until now. Given the small number of people on the StreamLab community this hasn’t rolled out extensively.
What’s in it for WATR?
The answer here - cut the pipe - yeah, call a plumber. Unless you’re a very confident (or reckless) DIY-er you would need help! You would call WATR’s ALD division for help. It’s less clear that there is any product margin for WATR selling another company’s product and in the interview no one asks this.
Meanwhile the broker believes there’s “considerable” potential although it’s unclear what evidence this “considerable” potential is based on. Given that the strategy is to develop and sell WATR’s products, to see so much emphasis given to a 3rd party’s product (when the product margin might be nil?) and nothing to the success of its own products seems bizarre. Why do we not have some great news on Pulse? On Intelliditch, or whatever it’s being called today?
2025
Look, I’ve been (more than) pretty negative thus far. The numbers are the numbers and the facts are the facts. We can dress up a year on year positive and gloss over other metrics or we can get into the weeds (and more so, once we actually have the 2024 annual report).
But there’s another number. 2025.
Interesting to see the 2 brokers who make guesses on future performance are both guessing on an acceleration in 2025. That’s my guess too, still, despite my negativity today. I am keeping the faith.
My basis for including this idea in my 25 for 25 was to heed little Dutch boys racing to or from the dam. 3Q24 vs 1H24 was an acceleration while 4Q24 is less impressive. Overall the thesis remains the same.
In 2025 I want to see higher margins from more direct sales, I… we want synergies in the Dallas acquisition, in Fresno, in New York, all the synergy stories need to become synergy actuals. I like how they’re selectively targetting areas of the US, and the strategy appears good but we need better visibility of that.
We need continued and more exciting international market growth (Ireland, EU, Australia, UK) and we need to see evidence of success in those markets. They are the stand out performers in 2024 yet get no mention in the interview.
We need particularly some knock out *WATR* product news.
Water management I believe is a powerful macro with tailwinds so WATR “should” be able to profit from those. So do it.
One broker guesses that Franchise Royalty will remain at $6.5m in 2025 which implies very strong growth for the remaining Franchises (given the loss of Franchises acquired and now ALD Corporate in 2025). I’m not sure that will happen. Guess again.
Leaving that aside, at least a 16% overall growth figure in revenue is what should be expected, but we need to begin to see evidence of that in the 1Q25 update, and in the interims.
As a last point, I considered Will Knell presented himself well although he looked pretty nervous I thought. I hope all investors will join with me in wishing him the best and we are excited by what he can deliver. But as the interviewer pointed out there are high expectations placed on him and rightly so. The Dallas franchise hasn’t come cheap and the options he’s been granted, plus the 2027 earn in are the reasons we have those expectations for WATR to deliver.
Regards
The Oak Bloke.
Disclaimers:
This is not advice, make your own investment decisions.
Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"
Hi OB
My problem with the Chubb deal for WATR is the tech versus the model that ONDO have. Theirs clips on a pipe and has patented thermal IPR that can detect minute drip quantities and also has an app that has some pretty sophisticated algorithms meaning that false positives are very low.
This is free to the consumer in the US (the insurer pays for it) and ONDO also have a plumbing service so I expect the take up will be much bigger. Even if it weren't free you can buy the kit for $180 and fit it yourself without pipe cutting, and is more than half the cost.
Why would you buy the Chubb version? I don't see any benefits - just less convenience and a much higher price.
So I'd be surprised if it gets much real traction and therefore I discount that partnership to zero. Investment case on WATR, for me at least, depends on its current model of find and repair in commercial premises. Not to say that's a bad thing but as you say QoQ numbers were....er patchy..........
WATR is one I've watched for a few years now. It looks such obviously good technology, but ultimately no real moat. And in that time, the shares haven't produced any decent return.
They may well be clients of Vox Markets, which would explain the keeness. I don't know if Paul Hill holds personally, though he publishes his portfolio quite regularly so easily found out, I suppose...
Perhaps they'll get a mention in this week's Small Cap Review chat in a couple of hours.
Personally, I'm losing interest in making an investment here, in a market abound with opportunities
A good article as ever OB. Thanks!
Jon