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Water Intelligence delivers solid Q3 results, set for strong 2025 growth

13:00, 5th December 2024
Paul Hill
PMH Capital
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"Water the flowers and cut the weeds" is a sure-fire investment strategy to increase one's wealth. The tricky bit of course is distinguishing between the two - which is why it is crucial to assess businesses over the economic cycle.

One GARP stock that has consistently delivered positive results 'come rain or shine' is Water Intelligence (WATRFollow | WATR whose revenues and shares have more than 10 bagged over the past decade.

You see, its super accurate leak/blockage detection, drainage and remediation solutions - that are acoustically powered and minimally invasive - are ideal for identifying and repairing even the most difficult-to-reach cracks, holes or obstructions in pipes across all diameters.

In effect, WATR provides a 'one stop shop' for homes, insurers, swimming pool owners, farmers (re efficient irrigation) and utilities to save water, minimize sewage spills, cut costs and reduce regulatory fines.

Indeed, today's 'in line' Q3'24 trading update was more of the same, posting Sept YTD’24 sales, adjusted EDITDA and PBT of $63.5m (+10%), $11.9m (+11%) and $7.7m (+6%) respectively; and closing the period with net debt of $10.9m (or 0.84x EBITDA) while targeting Q4 turnover, EBITDA and PBT of $18.1m ($22.0m Q3), $3.2m ($3.2m) and $1.9m ($1.7m) in order to hit house broker Dowgate Capital's FY'24 expectations.

That said, this short-term performance is not why I own the shares. Far more importantly, I believe its top and bottom lines will consistently expand by mid-teen percentages over the next decade - which is in stark contrast to its modest 11.2x forward PE ratio.

Here, demand is being driven by the secular tailwinds of global warming and climate change (eg water conservation and stormwater damage), alongside organic and acquisitive growth, new products, and leveraging its propriety technology.

This means, if I'm right, the next few years could be transformational for its valuation, as the stock benefits from rapid expansion, higher EPS and a major re-rating.

All told, the group generates around $200m of system-wide turnover, and is forecast by house broker Dowgate Capital to deliver FY'24 revenues, adjusted PBT and EPS of $81.6m, $9.6m and 38.3c respectively, and climbing to $93.5m, $11.2m and 44.5c next - thus putting the stock on a compelling 12.8x PER, falling to 11.2x in 2025 and equivalent to a 0.8x PEG ratio.

This represents an attractive entry point for a high-repeat revenue, cash generative and lower-risk group. In fact, I would not be too surprised if the stock doubled over next 3-5 years, with Dowgate Capital similarly having a 850p/share target price.

Executive Chairman Dr. Patrick DeSouza commenting: "We have a had a busy Q3 and start to Q4. Our team is executing along all facets of a capital allocation plan that is expected to produce accelerated growth in 2025. Our balance sheet remains strong, enabling us to continue to drive growth from our capital allocation plan."

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Disclaimer & Declaration of Interest

The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.

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