Vysarn Ltd - Updated Investment Thesis
The multi-bagger that may take a lifetime to find
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This week
The Week in the Markets: One pager with a concise summary of the markets plus the highlights of the week regarding macroeconomy, liquidity, commodities, Middle East, Bitcoin, Earnings season…
Emma Villas 1H24 Results - A small luxury vacation home rental company that manages more than 700 Italian Villas and made its IPO in September 2023
Vysarn Ltd - Updated Investment Thesis: Vertically integrated Australian small cap providing water services in Australia. Since our initial thesis in February 2023, it has multiplied its share price by 5x. Vysarn has just announced two acquisitions to take the company to the next level. We are updating the thesis and our forecasts for this fantastic company.
Portfolio Management: Including updates on our 3-stage monitor, comments on several companies, and our macro views, along with their respective movements in both equities and all asset portfolios (New Fortress Energy, Ecoener, Jack in the Box… updates)
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The Week in the Markets
A tremendously volatile week due to the combination of economic and geopolitical events. Tensions in the Middle East, the ports strike on the U.S. East Coast, the surprising employment data, and the impact of recent measures in China were the major drivers of the week.
The main U.S. indices saw slight gains and distanced themselves significantly from their European peers (partly explained by the fact that what prevented the U.S. from closing in the red was the strong performance of the Magnificent 7 and the increasing evidence that their respective economies are moving at very different paces). Notably, Chinese stocks continue their recovery since the government announced stimulus measures two weeks ago.
The big winner of the week was oil, which rebounded nearly 10% due to the attacks by Iran on Israel. If the implications of the conflict extend to the Red Sea, the spike in prices could be much larger. Exxon gained almost 10%, and the energy sector was by far the best performer of the week.
It’s interesting to observe the asset flows this week as the news developed. Small caps, which had been the most affected by market jitters and the volatility spike (with the VIX nearing 21 on Thursday), recovered after Friday's employment report. The dollar acted as a safe-haven asset throughout the week and ended up appreciating more than 2% against other currencies. Meanwhile, the 10-year bond yields recovered after the employment data, and the U.S. 10Y closed near 4%, as rate cut expectations fell.
Emerging markets (which we have discussed extensively in recent weeks) are now up 16.66% year-to-date (and almost 20% in the last two months), driven largely by the Chinese recovery.
Highlights of the week
US East Cost ports strike (maritime containers transport) - Earlier this week, the International Longshoremen's Association went on strike, affecting 36 East Coast ports and causing estimated daily losses of $1 to $5 billion. Despite the disruption, the strike was resolved after three days with a wage agreement, granting workers a 62% raise over six years, increasing average wages from $39 to $63 per hour.
While the wage hike may be mildly inflationary, the short strike avoided more severe economic consequences. Temporary disruptions in the labor market from the strike and Hurricane Helene may raise jobless claims, but conditions are expected to normalize over time.
Middle East conflict - This week saw a sharp escalation in Middle East tensions as Israel faced an Iranian missile strike, which led to an initial spike in oil prices, safe-haven assets like gold and Treasury bonds, and a surge in the VIX volatility index. However, as the week progressed, the market reaction eased, with Treasury bonds, gold, and the VIX index all reversing their gains. Despite this, oil prices remained elevated, with WTI crude rising over 10% this week, reflecting concerns about potential disruptions to global energy supplies due to the conflict.
Employment Data
In the lead-up to the crucial U.S. elections, a strong employment report was released on Friday. Non-farm payrolls increased by 254,000 in September, surpassing the previous 12-month average of 203,000. Additionally, job revisions for July and August added 72,000 more jobs than previously reported - Honestly, we expects adjustments to this figure in the future, but let’s take what we have today -
Report highlights:
Food and beverage services saw a massive rise of 69,000 jobs.
Healthcare added 45,000 jobs, slightly below its recent average.
Government employment rose by 31,000.
Social assistance gained 27,000 jobs, and construction added 25,000.
The unemployment rate dropped to 4.1%, and 430,000 more people were employed—the largest increase since March. Full-time employment saw a jump of 631,000, while part-time employment fell by 201,000.
Interest rates cuts
After the publication of the data, market expectations regarding rate cuts readjusted, and the market now prices in two more rate cuts of 25 bps in 2024
In fact, Timiraos, the chief economist at The New York Times who leaked the 50 bps cut when everyone was expecting 25 bps, published a tweet yesterday at market close that literally said FED is going to cut rates by 25 bps in November.
You can make all the predictions you want, but sometimes the simplest information is right in front of you, and it seems that everything has already been discussed for November.
In summary, looking at the events of this week, we see reasons for both optimists and pessimists to maintain their theses.
On the optimistic side: Markets are once again near highs, China is implementing stimulus measures, the port strike (an inflationary threat) has been resolved, and employment data seems to confirm that the long-awaited soft landing could become a reality in the coming months.
On the pessimistic one: The Middle East appears to be a true pressure cooker, employment data raises certain suspicions and fears of an adjustment in the coming months, and there’s the volatility associated with the U.S. elections just around the corner.
For our part, we may have a contrasted opinion on what we think will happen; however, what’s important is to be clear about what to do in each situation and how to protect oneself and take advantage of each outcome.
Some interesting Data about markets this week & YTD
Real Estate and Utilities (the main beneficiaries of rate cuts) were the most notable performers in 3Q24, while on the other hand, Tech and Energy (hit by the collapse in oil prices during this period) were the worst performers.
Note: This material is intended solely for educational purposes and should not be construed as any type of financial advise / investment recommendation.
Vysarn Updated Investment Thesis
Vysarn Ltd is a vertically integrated Australian small cap providing water services in Australia. Since the first time we talked about it, 18 months ago, the company has grown significantly, multiplying its stock price by five times. Today, we update our investment thesis, focusing on the current company and its— from our perspective—still considerable potential for the future, considering the two acquisitions it has made in recent days that have given Vysarn a new dimension (increasing from 5 to 7 business divisions, completing its vertical integration throughout the water cycle, and establishing a presence across Australia—not just the West Coast as it had been until now).
Before we start, let’s do a brief recap of what the company was like before this acquisition, which has been a turning point in the company’s history. During this period, we have been in contact with its CEO, and it is remarkable that they have always fulfilled everything they said. The last time, they told us that M&A was going to be something noteworthy, and it certainly has been…
Introduction to Vysarn Pre- M&A
History
Peter Hutchinson, the current Chairman, purchased MHM Metals, an unlisted ASX company, and renamed it Vysarn in late 2017. In April 2019, Vysarn agreed to buy drilling assets from Ausdrill for $16 million and subsequently relisted on the ASX in September. With funding from the relisting ($7 million) and debt ($8.8 million), Vysarn's subsidiary, Pentium Hydro, acquired ten drilling rigs and additional equipment, with a fair value exceeding the purchase price by $7 million. Interesting to highlight that Vysarn’s Chairman already led a company that multiplied the value of their share x37 in five years.
Shortly after relisting, Vysarn secured its first contract for drilling services and transitioned from short-term to longer-term contracts with tier-one clients, driven by strong demand, which led to the acquisition of two additional drilling rigs and nearly full utilization rates.
In November 2021, Vysarn acquired Yield Test Pumping (Pentium Test Pumping) for less than 4 times EV/EBITDA, marking the start of the company's vertical integration. Yield had already secured a two-year contract with Fortescue Metals Group (FMG) prior to the acquisition.
By February 2022, Vysarn launched its consulting division, Pentium Water, and in the summer of 2022, it acquired ProEng for $2.6 million (3x EV/NPBT), entering the Managed Aquifer Recharge (MAR) segment. ProEng demonstrated management's M&A capabilities, achieving over $1.5 million in NPBT within a year of consolidation.
Shortly thereafter, Vysarn established a 50/50 Joint Venture with Concept, a leader in fluid containment solutions in Eastern Australia. And at the end of 2023, Vysarn launched its own Asset Management division (VAM)
In the last few days, they have acquired CMP and WWS, growing its pro forma revenues from $76MM to $115MM y su NPBT de $11MM a $19.3MM
In the image, we can observe Vysarn's transformation in recent months
Business Model
Before the acquisitions, Vysarn had 5 divisions focused on different parts of the water value chain. All of them experienced double-digit growth (Vysarn's fiscal year ends on June 30).
For those who are not familiar with Vysarn, here's a quick summary of each of the divisions before the M&A, before we focus on the acquisitions, the company's current situation, financials, and our outlook for it.
1) Pentium Hydro - Hydrogeological drilling:
Vysarn started their operations with Pentium Hydro, which continues to be the main revenue contributor. Pentium Hydro drills bore fields and extracts the water above the iron ore.
More than 75% of the iron ore mines developed since 2000 in the Pilbara region have a part of the ore below the water table, which must be dewatered to be exploited. This is achieved by pumping out from cased bores drilled by contractors like Vysarn. This pumping must be maintained continuously to keep the groundwater levels suppressed and the mine pit dry.
The service is essential because if the water mixes with the iron ore, this becomes low-grade and cannot be sold. The dewatered water is used for mine operations and town drinking water, and another percentage is returned to the environment through Managed Aquifer Recharge (other of the segments of Vysarn).
The dewatering process is:
Drill and case multiple boreholes.
Install pumps, which abstract water from the pit for reuse or disposal. Monitor and account for abstracted water.
Dewatering must be everyday operational for 3–6 months to allow sufficient drawdown.
Repeat the process as every 1–2 years the mine expands and takes over boreholes or deepens beyond dewatered zones.
As they have been doing the last few years, Vysarn aims to continue signing multi-year and multi-rig contracts with tier-one clients, which are stricter with the conditions and characteristics of the rigs, but they are also more reliable and pay a higher price. The management seems confident with their aim to achieve longer-term and higher-priced contracts.
This segment generates the funding for M&A & organic launches. It is the most capital-intensive business and the most vulnerable to unexpected maintenance or repairs and weather conditions.
Regarding the composition of the rig's base, we can expect Vysarn to gradually sell conventional rigs and buy dual-rotary rigs, which can simultaneously drill and case holes and are more efficient in ground conditions containing unconsolidated formations like sand or gravel.
Apart from the strategy with dual-rotary rigs, opportunities are being evaluated to grow in new segments such as electrification and automation.
2) Pentium Test Pumping - Injection Testing:
After the well is drilled and cased (services provided by Pentium Hydro), the next step is to measure the water-level response within the well and the surroundings (how effective has been the drawdown effect), and conduct tests regarding the pump rates and the hydraulic properties of the aquifer, among others. The five critical tests that the pumping unit does are calibration, step, constant rate, artesian well, and recovery tests.
This groundwater data is of great importance for clients because, from this data, companies take investment and production decisions.
Vysarn acquired Yield Test Pumping for $2.6 M in November 2021. At the time of the acquisition, PTP had just signed a Master Service Agreement with FNG. So, they inherited the entire MSA for its lifespan. Test pumping vehicles cost approximately $2-2.5M. Dwayne Moppet was the maximum shareholder of the acquired company and serves as a managing director of Pentium Test Pumping. At the time of the acquisition, Vysarn and Mr. Moppet entered into an employment agreement for the following three years. He has an incentive of up to $750,000 during the three-year period if they achieve: $650,000 EBITDA in year 1, $1,200,000 EBITDA in year 2 and $1,350,000 EBITA in year 3.
The acquisition has a clear sense of integrating the next service after drilling. Moreover, Test Pumping and Hydro can share some of the equipment: telemetric, compressors, etc. The strategy of the company is to cross-sell from Pentium Hydro to Pentium Test Pumping. Roy Hill and other clients asked them to enter the test pumping market and also in injection testing.
The main competitor and leader in test pumping is MacArthur Drilling and Pumping (MDP). Pentium test has a range of capabilities not only in mining but also in agriculture, municipalities, and government.
They currently have two rigs in operation (the second one completed commissioning in December 2023) and a trial with a new client. Vysarn has also invested in a scaled-down suite of test pumping units for Tier 2 clients.