Vysarn (ASX:VYS) reported their half year earnings for the half year ended 31 December 2024 on the 28th of February. While the Vysarn share price initially gained over 7% to 44c in response to the release, the Vysarn share price has since dropped back to 41 cents per share.
Why Did The Vysarn Share Price Rise In Response to the Vysarn H1 FY 2025 Results?
I believe the initial Vysarn share price rise was caused by two main drivers:
- Management’s guidance at their most recent AGM was for H1 FY 2025 NPBT to come in under H2 2024, which was $5.05 million. The result exceeded this guidance by about 4%, with reported NPBT of $5.24 million for H1 FY 2025.
- Relatively bullish commentary around H2 earnings and increased activity in the Vysarn Asset Management segment of the business.
Although this result was better than my expectations, headline revenue and earnings numbers look poor at face value, with revenue rising 5%, but NPBT falling 11% compared to prior corresponding period (PCP). I suspect some of the difference could be explained by a number of one-off acquisition costs incurred throughout the period, but management prefers to report statutory numbers rather than underlying.
The other main driver for this was the poor performance in Vysarn’s industrial segment (Pentium Hydro and Pentium Test Pumping) where underutilisation of the drill rigs was flagged as the issue. As per management’s cautious outlook at the AGM in November, it has since been confirmed that up to six Pentium Hydro drill rigs were on standby at some time through the half, which is 50% of Vysarn’s fleet.
In their commentary, management stated that “latent demand from Tier 1 iron ore clients is being realised and is presenting an opportunity for all assets to be redeployed within 2HFY25. Hydrogeological drill rig demand is anticipated to enable PH to return to a steady state earnings run rate within the half, with demand also presenting an opportunity for PH to have up to four rigs double shifting by the last quarter.” This should help Pentium Hydro rebound from a particularly weak first half.
Diversifying The Business
Vysarn’s first half result only highlights the need for the company to diversify away from this capital intensive style of business, as earnings are heavily reliant on utilisation rates driven by clients with intermittent demand.
This diversification will be much clearer to see after H2 FY 2025 as management has clearly defined that this has been a priority for some time and is evidenced by the two acquisitions made in the half: CMP consulting group, which provides access to mainly utility wastewater consulting on the east coast and Waste Water Services (WWS), which provides access to wastewater management solutions in the west.
These businesses contributed one month and three months of earnings respectively throughout H1 FY 2025 and are complementary businesses that offer the opportunity to cross-sell their products and services into new markets both on the east and west coasts.
The chart below illustrates that the capital intensive style of business is slowly becoming less prominent for the group as the technology and advisory profits increase. This will be even more noticeable when H2 numbers are reported as CMP and WWS will have contributed full halves of earnings.
Source: Vysarn company financials (data), author (analysis and presentation). Note: Industrial Segment includes Pentium Hydro & Pentium Test Pumping, Technology segment includes Project Engineering & WWS, and Advisory Segment includes Pentium Water & CMP. These figures exclude the negative contribution of group overheads each half.
Balance Sheet and Cash Flow Improves
Vysarn’s cash flow from operations for the period was particularly strong at $14.8 million, up 78% on the PCP, and 681% on H2 FY 2024. This translated well to free cash flow generation of about $9 million, based on my calculations, and leaves the company in a strong financial position of $15.8 million in net cash at 31 December 2024. This was somewhat expected due to the large inflows from accounts receivable in July and August 2024. It also highlights the nature of doing business with major mining companies such as BHP and RIO – these companies tend to pay when they want, with smaller companies at their behest.
As you can see in the chart below, this was an exceptional half for operating cash flow, off the back of a poor H2 FY 2024.
Source: Company financials (date), author (analysis and presentation)
Vysarn Outlook for H2 FY 2025 and Beyond
Management’s commentary suggests that the integration of the two acquisitions made in H1 FY 2025 has occurred seamlessly, as they expect to achieve the run rate NPBT of $19.3 million in H2 FY2025. Taking this into account, I expect NPBT for FY 2025 as a whole to come in around $15 million. Based on management’s commentary, I believe the real potential for an increase in this guidance could come from the newly named technology segment of the business.
This segment includes the existing subsidiary of Project Engineering which operates in the managed aquifer recharge space, and the newly acquired WWS. Both segments have order books for H2 FY 2025 and beyond that can maintain expected earnings. However Vysarn’s management indicates that they anticipate that “the order book for Managed Aquifer Recharge units in 2HFY25 has the potential to expand further” on the Project Engineering side, and state that WWS has an “order book that is anticipated to support an earnings run rate in FY2025 that is in excess of that identified during the due diligence phase of the acquisition and subsequently disclosed during the capital raising process”.
Also included in the commentary for the half was confirmation that the company is progressing well on their asset management business. In particular, their first project – the Kariyarra Water Scheme – which is a 50/50 joint venture with the Kariyarra Aboriginal Corporation. One quote in particular drove home the potential of this segment to be company defining:
“Further extensive desktop and field investigations in FY 2025 continue to indicate that the Kariyarra Water Scheme has the potential to be what the Company considers a groundwater resource of state and national significance.”
News on this segment is expected in the near future as the company is still expecting the execution of the drilling and testing program in H2 FY 2025. If these results are positive, we could start to see some metrics provided around possible future earnings for this segment. Taking management’s guided full year run rate group earnings for H2 FY 2025 of $19.3 million NPBT, and applying a tax rate of 30% implies annualised NPAT of approximately $13.5 million. At the current share price of $0.405 and a market capitalisation of $215m, this puts Vysarn on a run-rate PE of approximately 16x. This is reasonably high compared to prior trading levels, and what a mining services business would typically trade on. However, I would argue that relying on these PE comparisons as a guide for Vysarn now is irrelevant as the company continues to diversify away from being solely a mining services business. Also, given the Vysarn Asset Management subsidiary is starting to come to life, there is reason to believe earnings will continue to grow.
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 Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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