Veris Limited: Restructure delivering to the bottom line

Veris Limited (ASX:VRS) yesterday delivered a great quarterly, that builds our confidence this is a hidden gem in the small caps we follow. Since the last desk note ($0.075), quarter on quarter, group revenue up 6.4% to $24.14 million (annualised close to $100 million), EBITDA has risen 211% to $1.8 million for the quarter. What makes this impressive, is its seasonally slow quarter along after snap COVID-19 lockdowns in January, and they are at the back end of a two year restructure that throws up a lot of one-off costs. The big plus is within Veris is Aqura Technologies, which has revenue growth circa 31% pa for the last five years. This alone could be worth $0.05 - $0.06 a share within VRS. Very few eyeballs on VRS, they keep this up, that will change. 

First - The quarterly (release here)

Source: Supplied. 

Today’s quarterly is exactly what we wanted to see. Revenue driving higher in a seasonally slow quarter, EBITDA lifting, after stripping out circa $7 million in costs, and all the COVID-19 snap lockdown setbacks. The Aqura Technologies business, within VRS is continuing to grow strongly (averaging 31% per annum for the last five years). If you are confident, as we are, that the turnaround is going to deliver good free cash flow, then this business is sitting in a structural sweet spot, with tailwinds around infrastructure (State and Federal), mining in a mini-boom, commercial and residential property ramping up, and Defence is accelerating massively (one of the few approved Defence suppliers in their field, at a time when the government is looking to spend $280 billion over 10 years). 

VRS - 5yr Chart

VRS – Transformational year – Time to Shine

We have written about the VRS transformation previously [here]. A company that under previous management tried to do too much with too little. The new CEO, Michael Shirley, has been there for 19 months, and the latest quarterly shows that the indigestion of significant restructuring is behind and the core business going forward is beginning to generate good cashflow. It is understandable that the market wants to see evidence of the re-structure of the core surveying business, just as management don’t want to promise results they won’t deliver (overly cautious?). Hidden within VRS, is the unified communications business, Aqura Technologies, which in my view could be worth almost the current market cap of the entire group in a years time.  

Before I focus on the core surveying business in Veris, if you take one thing away from this note, understand what “Aqura Technologies” is and what it could be worth.

Perfecting communications for the major mining companies.

• Aqura puts in place specialist communications for large companies (design, installation, and management). It has BHP, RIO, Fortescue, OZ minerals, Newmont, Citic Pacific, Santos, Bunnings and Cubic (Defence) as clients.
• They make communications work on mine sites. Modern mine sites move significant data, they have autonomous vehicles, above and underground environments, safety, and worker communications needs. Nearly always in remote areas. Aqura has embedded itself as the company that gets the systems (hardware) up, then maintains the communications. Some practical examples – They delivered eight of RIO’s nine mines that enable their autonomy strategy. First to design and implement an underground LTE network for IIOT and autonomy.
• BHP/RIO could easily take an in-house approach, but they choose to use Aqura, ask yourself why.
• Aqura has led the way in working with and perfecting communications with the Tier 1 miners. Now there is a massive opportunity to work through the tier two miners, who want a similar capability delivered. Then beyond that other sectors like Defence (which is massive, and they are already approved) and retail (Bunnings)
• Big miners can carry the upfront cost then pay a management fee. Now Aqura can offer a financed model to the tier two miners, making it easier to access the same services.
• Since 2016 Revenue Growth has averaged 31% pa.
• Annualising the 1H ($11.1 million), it is on track to do $22 million in FY21. Its EBITDA contribution should be ~ $1.0 million. (today's Quarterly suggests I might be behind on my numbers).

Aqura Technologies’ Q3 performance showed a strong result in the face of seasonal slowdowns. With new contract awards from key blue-chip clients, the business now has a record pipeline of work in hand which continues to grow.

We see growth in FY22 could be approaching $30.0 million. If they deliver that, then it could contribute ~$3.0 in EBITDA.

A company with top-line growth of ~30%, proven tier 1 clients, with significant growth opportunities, contributing ~ $3.0 million of EBITDA in FY22 trading on 10x’s EBITDA is $30 million. VRS has an Enterprise Value of $30 million! (Market Cap $35 million at 7c less $5 million of cash in the bank).

Focus on this slide for a second (Slide is from Feb - Noting they have signed a $1.8 million contract post this slide being released)

Veris Australia – the Core Business (Surveying) – restructure then profit 

Veris Australia is the largest surveying business in the country. Finding dominant businesses (in terms of mkt share) that are successfully restructured in the small cap space is not easy. You need to spend a lot of time with management, develop trust again, and form your views outside any research coverage (given they won’t be covered due to size or on the naughty list because of previous management decisions). This is the opportunity though if you feel they can transition back to profitability. We think VRS is successfully coming out the other side of its restructuring program, and the core surveying business can deliver significant EBITDA over forward years. 

Here is why: 

• On a full-year basis, we think VRS has stripped out about $7m of costs. This has involved reducing the vehicle fleet from ~380 down to ~260, reducing non-performing middle and senior management, paying out lease liabilities, reducing corporate overheads across the states.
• As these cost outs come out there is a hit to cashflow (breaking leases, redundancy payouts, centralised corporate offices etc) which will impact cashflow in the current financial year. What we see in today’s QTR results is so encouraging – despite the hits EBITDA is rising. What makes this interesting, they achieved this despite it being the seasonally worst period, snap COVID lockdowns meant the company decided to shut down for a few weeks (ie take leave in Jan). And despite the challenges – the secured backlog of work is more than $45m. 
• VRS won’t have to worry about the “Tax” in “EBIT” for years… tax losses carried forward. That means more free cashflow.
• Looking to FY22 cashflow could improve significantly. FY21 Surveying revenue could be $80-84 million. FY22, that could grow towards $100 million. On our back of the envelope numbers this could see around $17 million of operating cashflow pre-lease liabilities. Lease liabilities of $7.0 million, delivers $10 million. We then assume they spend another $3-4 million on expansionary Capex, which would leave $6-7 million in free cash flow. Using the bottom end, VRS could be trading on about five times FY22 free cash flow (current EV $30 million). To put this multiple in perspective, Acrow Formwork (ASX:ACF) which is in a similar sector, similar tailwinds, trades on 11 times FY22 free cashflow ($81.7 million market cap / FY22 free cashflow forecast of $7.4 million – source Bell Potter). (pls note – I am not an analyst, and I am not making forecasts, this is a rough framework based on previous presentations and quarterlies and my views – the company does not make forecasts at this point - these assumptions cannot be relied upon).
• Interesting to note, that in the 2012 mining boom, surveying revenue spiked to $150 million. Let’s think about the current tailwinds, very strong mining sector again, very strong infrastructure spending, commercial and residential property accelerating, Defence is rapidly accelerating ($270 billion flagged to be spent over the next decade), and they are an accredited Defence supplier which is very hard to get.
• The restructure has been successful despite COVID and cross border COVID lockdowns, particularly in WA. This reduced VRS ability to get better utilisation rates as a national supplier, and hopefully that is now behind them.
• Management and forecasts – when you have a saved a business from going under, you don’t sing your own praises from the rooftops early, until you are certain of what you are singing about. VRS is in the results first, talk about forecasts later mode. The restructure needs to deliver a base of profitability before they talk about the future. 
  

Some Key Slides on VRS/Surveying - What they do

What was involved with the restructure

• How big is the market? (note Defence is going to ramp up massively, which is not on the slide)

What is the “Blue Sky” for Veris? Monetise the data!

• Let’s start by saying this is not even relevant unless the restructure gives VRS the solid foundation to work from in terms of cash flow in the core surveying business. However, if you dream a little, VRS could be sitting on one of the better/cheapest geospatial data plays in the country.
• Everyday, VRS surveyors are creating massive amounts of data for their clients. Normally, this data just gets handed to the client at the end of the job. What sets this data apart, is that only a Surveyor can certify the accuracy of the data (massive barriers to entry). So, without boots on the ground, other data companies cannot create this “record of truth” as a surveyor does (ie it cannot be relied upon).
• Let’s say instead of just handing over the data at the end of a job, VRS agree to retain, store and manage a copy of that data for future use. Then this data becomes hugely valuable. This data management creates a significant competitive advantage in tendering for government and large contracts. It means they don’t just compete on a flat hourly rate for tenders, they have an advantage competitors don’t (pre-existing certified data sets speed up delivery, reduce time and cost, which is huge in civil contracting).
• What could the geo-spatial data play be worth if executed well?
  
  Apart from the return benefit to the Surveying business, it is a business within itself. Pointerra (3DP.ASX) is well known geospatial data play. What do they do?
  
  Pointerra Ltd (ASX:3DP) provides an end to end, cloud-based data as a service solution for capturing, storing, manipulating and analysing massive 3D datasets in the geospatial sector. Its customer base spans companies across the pole and power sector, resources, construction, data capture and surveyor and mapping, as well as government agencies.

Sound familiar?

How does the market value this monetisation of 3DP data? The current market cap is $405 million. FY21 annual contract value $10.2 million, revenue $5.9 million, EBITDA loss -$0.6 million. Earnings summarised on recent RAAS research note.

This slide talks about how VRS will approach the data play, and while in its early days, VRS can talk to many examples of how they are already rolling this out to key clients. Not easy to immediately understand, but worth reading and thinking through.

In Summary

If VRS successfully restructure, to me it looks very cheap vs peers. Aqura Technologies alone could be worth a large part of the current market cap. They move through the restructure and successfully bring into play the geospatial data play, then significant value can be realised. We will watch the quarterlies to see how successful the restructure has been, revenue is not the issue, it's about utilisation and cash flow, which is improving.  

Disclosure - This desk note was sent to clients on 06/05/2021.  I (Tom Schoenmaker) am a shareholder, and Wentworth Securities raised funds for VRS recently at 7c for which we received fees, which I participated in. I am not an analyst, and I am not making any forecasts that you can rely upon and the company has had no input into this note and has not approved any assumptions, nor has it paid for the note. These are the author's views only. There are always significant unknown risks in small caps, and delivering on plans, and general risks that are not discussed in this note. Before doing any trade, you should speak with a professional advisor, to see if it is appropriate for you. 

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