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 Prev- 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.