Vysarn 1H23 results & CEO interview

What is Vysarn Ltd?

Vysarn is a vertically integrated company with five business divisions providing water services in Western Australia. Vysarn started its operations in 2019 with ten drilling rigs and since then, they have grown to make A$29.08MM in revenues in the six months ended in December 2022. It is currently trading at less than 3.5 EV/EBITDA 2023.

Just some hours after the publication of our investment thesis on Vysarn, the 1H23 results were released. Last Thursday, we had the opportunity to hold a meeting with James Clement, the CEO of the company. For these reasons, we bring this results commentary and thesis update.

Vysarn 1H23 results

In general lines, Vysarn 1H23 results  – for the six months ended in December – were better than expected with an interesting update in all the divisions. The main highlights of the results were:

• Revenues: A$29.08 million vs A$24.04 in H2 2022.
• EBITDA: A$4.24 million vs A$3.55 in H2 2022.
• NPBT: A$1.60 million vs A$0.99 in H2 2022.

The earnings after tax were negative due to a non-cash expense of 1.6 million (change in the tax rate). Vysarn has credit tax losses of A$11.63 million to make the tax expenses non-cash in the future.

• Net debt decreased to A$3.4 million compared to A$4.2 million in June 2022. Cash and cash equivalents amount to A$7.1 million.
• Operating Cash Flow: A$5.35 million vs A$5.54 in 2H22

It is more relevant to compare with 2H22 to compare the impact of the acquisitions and business launches.

By divisions:

	Revenues	EBT	Assets	Liabilities
Pentium Hydro	21,976,872	1,444,808	44,367,377	20,795,894
Test Pumping	1,422,937	377,528	4,151,456	1,009,754
ProEng	3,968,363	740,849	5,132,309	3,536,658
Other	1,714,951	(964,771)	1,551,203	1,638,690

Vysarn Pentium Hydro

 As commented in the thesis, the Vysarn 1H23 results have been weaker due to the upgrade of the drilling rigs deployed for BHP. This has negatively the earnings and cash flow for Vysarn in this semester but is expected to provide superior results in the long-term.

The operations during the first months of the second half have gone as expected and they are already double shifting two of their rigs. Once they show clients, both in terms of quality and risk management, that they can operate successfully, they expect to increase the number of rigs double shifted.

The finalization of the contract with BHP is on February 2025, on May 2025 for Roy Hull and they are negotiating with FMG to extend the contract from November 2023 to November 2026 with an increase in price. With these contracts, we have a baseline of earnings that should contribute more than A$12 million EBITDA per year. The Operating Cash Flow/ EBITDA ratio is higher than one.

Vysarn Pentium Test Pumping

The results presented were in line with the objectives commented at the time of the acquisition.

The second test pumping unit is being built in Eastern Australia, should be commissioned in May, and start their operations in June/July. There are no earnings forecasted for this unit in this fiscal year. They are currently negotiating with a client to deploy this test pumping unit. Moreover, they are already investigating the investment for a third unit. Apart from multiplying revenues, these additions will increase the margins of the division.

Vysarn Pentium Water

They have almost multiplied by three the revenues earned in 2H22 (5 months). They are seeing a strong demand by current customers to be advised on other areas. Actively pursuing organic and acquisitive growth from water resource engineering, mine closure, water infrastructure and asset management. Later we will comment the acquisition strategy for Vysarn.

Vysarn Project Engineering

The results in this division beat considerably our expectations. Just to recall, they made the acquisition in October 2022 for A$2.8 million and they targeted A$850,000 per year before the effects of the growth strategy. In just six months they have accomplished almost four million in revenue and A$740,000 in EBT. Assuming they accomplished their targets in Q1 (1/4 of 850,000= A$212,500), once they integrated the business, they earned more than 525,000 for the quarter October-December.

ProEng has a good pipeline for this second half which will translate to around 60 projects for the year 2023 vs 45 at the time of the acquisition. As a bare minimum, they expect the same number of projects for 2024.  They will continue expanding the production capability and evolve the business to a more recurring revenue model.

Despite the already good results for the six months, we continue to see a strong growth potential for the following years. When we talked in our thesis about the multiple expansion of Vysarn, the change in the business model of ProEng could be one of the catalysts.

Vysarn Concept Joint Venture

We have to admit that this is one the the parts that we like the most due to the possibilities and the potential for the company in the future. However,  there were no news about it in the Vysarn 1H23 results. We talked with Mr. Clement about it, and he disclosed that they are in conversations with two prospective clients. 

An item which negatively affected the margins was the increase in consumables expense. Mr. Clement assured that this was due to a client request of one-year of consumables in advance. This expense should go down for the second half. Apart from consumables, the overhead expenses continue to be well controlled.

Main takeaways of our meeting with Vysarn CEO

Where analysed Vysarn a couple weeks ago, we explained that we liked the company but we had doubts with some actions we did not understand by the management. Fortunately, we had the opportunity to talk with James Clement, CEO of Vysarn Ltd, and clear out these doubts.

Apart from the business operations and perspectives, we approached what we called orange/yellow flags in our original investment thesis.

He decided to not exercise his performance rights because the ASX does not allow to extend the time of expiration of the options. So, he did not exercise the options of February 2023 and in change was awarded the same number of options for July 2024, when the options of the rest of the management will also expire. For us, this is cleared and, in fact, aligns for a longer term his interests with the ones of the shareholders. Mr. Clement assured that his intention is to stay in Vysarn for the long-term.

Overall, we had a good impression of Mr. Clement. He showed a clear vision about the present and future of Vysarn and answered all the questions in a very clear way. He also talked about adopting a more active relationship with investors which, in our view, will have a good impact on the understanding of the business by a larger number of investors.

Our thoughts about Vysarn 1H23 results and its future

The earnings release helped us have a greater visibility on the acquired divisions and the meeting with the CEO helped us have a greater understanding on the business and cleared out our doubts on the management decisions regarding performance rights and options.

Also, the current levels of debt compared to the drilling services peers, the management expertise, and with more than seven million in cash, it should not surprise us if Vysarn realises another acquisition during the following months. They are ready to continue their vertical integration with small acquisitions as they have been doing until now or execute some of larger scale. The experience in Vysarn and in the previous businesses they led, make us be confident on the management’s ability to execute the acquisition strategy.

After missing the guidance in the two previous years, we think that Vysarn has changed its approach to it. We believe that the guidance of a NPBT of A$5.1 million for the year 2023 is conservative.

With all, the cash generation of all the business is solid and proved, the growth prospects of each division are also clear, and already being well executed and the valuation (less than 3.5 EV/EBITDA) gives us a great margin of safety and revaluation opportunity.