Back in May this year, I (Ben here) highlighted how mining services company Vysarn (ASX: VYS) had just upgraded its guidance. Shareholders such as myself are delighted with the rise since then from 11.5 cents per share to 25.5 cents per share. However, based on the 2023 Vysarn AGM Presentation held on Friday, I have reason to believe the share price rise is justified by the business growth.
Vysarn’s earnings before tax (EBT) for the first 4 months of the year was reported as $4.5m, giving a run-rate of $13.5m for the full 2024 Financial Year. Basically, Vysarn has maintained its HY2 2023 revenue run rate, and increased their margins slightly.
I feel there is scope for further growth as management have flagged the possibility of up to 3 hydro-geological drilling rigs rolling onto double shifting by the end of the current financial year. Currently, there is only one rig that is being used for double shifting, which provides very accretive returns on capital given the sunk capital expenditure is already on the drill.
The Project Engineering arm of the business is obviously seeing good demand for their Managed Aquifer Recharge systems as management has flagged the establishment of a new facility to be online by the end of this financial year. This new facility is to double production in the near term to satisfy the anticipated future growth in demand for this product. While growth in this segment has been heavily reliant on the WA iron ore sector, management is looking to expand into other commodities, sectors, and geographies.
Management have flagged the possibility of a ‘company transformational’ acquisition in the near term while noting that they have secured a bank loan facility of $25m. While this is an interesting prospect, it relies heavily on management being able to identify the right target for the right price. We have seen with acquisitions such as the Project Engineering one, management has good form in this area, though it should still be considered a risk as acquisitions often don’t work out favourably. My preference would be for management to focus on the current businesses as their priority.
The most recent addition to the company which was announced to the market in October 2023 is the Vysarn Asset management segment (VAM). The Vysarn 2023 AGM presentation has provided more clarification on how this segment will operate and the revenue streams that could be generated from this. The segment has been created to unlock opportunities to own water and fund infrastructure by raising capital from external investors, without being dilutionary to Vysarn shareholders.
This will bring revenue through pentium water, which will identify and develop the projects, and then Vysarn Ltd, which will position itself to earn management fees and potential tolls on the water.
While the outlook for each segment of the business remains in line with my original thesis, there is still the management execution risk. As they branch out into new divisions and projects, this risk becomes greater. All we can do is look at the track record and judge accordingly.
The management team of Vysarn has done extremely well given the company was started 4 years ago with 10 dewatering drill rigs, and is now on the path to becoming a fully integrated end-to-end water business.
I would argue Vysarn is not only improving its business model, but also has an undemanding share price relative to its growth trajectory. Of course, demand could fluctuate and operating leverage could see volatile earnings, so Vysarn is not the kind of business you would expect to have a high P/E multiple. That said, at the current market cap of around $104m, Vysarn is currently priced at around 11 times forward earnings, by my estimation; I believe that is undemanding given the recent (and continuing) growth trajectory.
Disclosure: the author Benjamin Sayers owns shares in VYS and will not trade shares within 2 days of publication. The editor Claude Walker does not own shares in VYS and will not trade within 2 days of publication. This article is not intended to form the basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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