Small Cap Value Report (Wed 14 Feb 2018) - WATR, HSS, HSP, OTMP

Wednesday, Feb 14 2018 by

Good morning, it's Paul here.

My apologies that yesterday's article, a car dealerships special, was anything but special - actually it blew its head gasket immediately after leaving the showroom. Sorry about that, I got writer's block & there was nothing forthcoming unfortunately. So some time today has been allocated for me to go back & finish it.

Firstly I'll rattle through the handful of trading updates today from small caps.

Water Intelligence (LON:WATR)

Share price: 200p (up 11.4% at 08:10)
No. shares: 12.07m
Market cap: £24.1m

Q4 trading update & corporate development

Water Intelligence plc (AIM: WATR.L), a leading multinational provider of precision, minimally-invasive leak detection and remediation solutions for both potable and non-potable water is pleased to provide a trading statement for the year ended 31 December 2017.

We are also including an update on our corporate development as we expand our offerings to become a "one-stop" platform with a variety of cross-selling opportunities....

My first job is to look up "potable" in the dictionary! For anyone else who hasn't heard that term before, it means drinkable.

Key points;

  • Strong revenue growth - up 45% to $17.7m (note that this is a mainly USA business - 88% of H1 revenues came from USA)
  • Growth mainly came from corporate (i.e. own-operated), rather than franchisees.
  • Insurance channel looks an interesting growth area - revenues rising from $0.66m in 2016, to $2.5m in 2017;
Insurance channel momentum: first national account implemented; second account signed and in process of implementation; pipeline developing

  • Adjusted PBT rose 21% to $1.7m
  • Tax cuts - in USA should increase PAT in 2018 & beyond
  • Water loss is an increasingly important issue, globally (e.g. forest fires, Cape Town apparently close to running out of water)
  • Net debt $1.2m

Outlook - rather long-winded, but this is the key bit;

Global market demand for our solutions is increasing given climate issues and natural resource constraints. The wind is at our back, and we hope to make a difference. We believe that 2018 will bring significant additional revenue growth, both organically and through selected re-acquisition of our franchises.

Profits should also be further enhanced by recent tax legislation in the US, which is expected to materially reduce the Company's tax rate during 2018 and beyond.

Broker update - these days (post the…

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Water Intelligence plc, formerly Qonnectis plc, provides leak detection and remediation services. The Company offers a range of solutions (including products) for residential, commercial and municipal customers. The Company's segments include Royalties from franchisees, Corporate-operated Stores and Other activities, including product and equipment sales. Its geographical segments include US and International. The Company mainly operates in the United States, with operations in the United Kingdom and certain other countries. The Company's subsidiaries include Qonnectis Group Limited (holding company of ALD International Limited), ALD International Limited, American Leak Detection Holding Corp. (holding company of ALD Inc.) and American Leak Detection, Inc. (ALD). ALD International Limited and ALD provides leak detection product and services. more »

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HSS Hire Group plc provides tool and equipment hire and related services in the United Kingdom and Ireland through a network of over 300 locations across the nation. The Company's business focuses on supplying equipment and services to the fit-out, maintain and operate sectors of the market, with its businesses also supplying construction contractors. Its segments include HSS Core, which is engaged in the provision of tool and equipment hire and related services, and HSS Specialist segment, which is engaged in the provision of generator, climate control, powered access and cleaning hire equipment and the provision of cleaning maintenance services, under specialist brands. Its businesses include HSS hire, HSS One Call, HSS Training, ABird Power Solutions, Apex Power Solutions, Reintec cleaning equipment services and TecServ equipment maintenance. It caters to the customer base ranging from retailers and airports to facilities management companies and infrastructure developers. more »

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Hargreaves Services plc is engaged in sourcing, producing, processing, handling and transporting carbon-based and other bulk materials throughout the United Kingdom and Europe. The Company's principal activities are the provision of haulage services, waste transportation, mineral import, mining and processing, together with specialist earthworks and related activities. Its segments include Coal Distribution, Industrial Services, Logistics and Specialist Earthworks. The Coal Distribution segment provides coal, coke, minerals, smokeless fuel and biomass products to a range of industrial, wholesale and public sector energy consumers. The Industrial Services segment provides contract management services to clients in materials handling and a range of other industrial sectors. The Logistics segment provides bulk logistics to customers across the United Kingdom. The Specialist Earthworks segment provides earth moving, civil engineering and infrastructure services across the United Kingdom. more »

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  Is LON:WATR fundamentally strong or weak? Find out More »

32 Comments on this Article show/hide all

Effortless Cool 14th Feb '18 1 of 32

Water Intelligence (LON:WATR) please, Paul, who have issued quite a detailed year-end trading update this morning.

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MrContrarian 14th Feb '18 2 of 32

My morning smallcap tweet:

Origin Enterprises (LON:OGN), Keystone Law (LON:KEYS)

Origin Enterprises (OGN) CFO resigns. Sounds amicable.
Keystone Law (KEYS) Guides FY profits comfortably ahead of current market expectation.

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lemonjar 14th Feb '18 3 of 32

I'd be interested in your views on Plus500 (LON:PLUS) who just released their preliminary results, thanks

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runthejoules 14th Feb '18 4 of 32

Water Intelligence (LON:WATR) seconded please, seems intriguing, as does Iofina (LON:IOF), 'specialists in the exploration and production of iodine and halogen-based specialty chemical derivatives... pleased to announce the completion of construction and commencement of production at its IO#7 IOsorb® plant.' I don't hold as I'm opposed to fracking but wish I had spread bet its recovery!

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Paul Scott 14th Feb '18 5 of 32

In reply to post #315178

Hi lemonjar,

I'd be interested in your views on Plus500 (LON:PLUS) who just released their preliminary results, thanks

As it's a £1.3bn company, Plus500 is outside the scope of my coverage of small caps (I usually go up to about £400m mkt cap, sometimes a bit above).

At a quick glance though, the results today look spectacularly good. The valuation looks cheap.

The big issue of course, is whether these profits are sustainable, or whether the regulators will catch up with them & clamp down? Personally I'm steering clear of this one, but as you can see from the share price, people who ignored the regulatory risk have absolutely cleaned up!

Regards, Paul.

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matylda 14th Feb '18 6 of 32

Morning Paul,

Keystone Law (LON:KEYS) seems quite interesting but can find no broker notes, nada!

Calls itself "The fast growing, UK Top 100, challenger law firm".

Any view most welcome, I think it's a case of wait til April (actual results).

Thanks in advance and good luck with the Car Retailers Special!

Blog: Briefed Up
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Gromley 14th Feb '18 7 of 32

Last time Water Intelligence (LON:WATR) was discussed I found myself put off by the overly effusive language around revenue growth, with little comment about profits. Shares are up c. 50% since then I think, ho hum.

Anyway today's report is more helpful I think and certainly leaves this still looking interesting imho. With adjusted pbt up 21% (from +8% in the previous year). I can't help still being irritated by the slightly by the language in several places, but that's probably just me being curmudgeonly! "Note that profits before taxes unadjusted actually grew faster at approximately 50% year-over-year." - So what - surely the point of adjusted earnings it to show the real underlying growth?

With that in mind I can't resist a little "compare and contrast" even though the other two co.s are outside of the remit of this column.

Coca Cola HBC AG (LON:CCH) - RNS titled "EXCEPTIONAL SET OF RESULTS" - really? Can't you just let us decide how good they are? Volume growth of 2.2% and revenue growth of 4.9% hardly seem to fit the bill of "exceptional". "comparable ebit" growth of 20% is more like it -AFAIK this has been delivered in emerging markets with modest revenue growth and significant margin expansion. - Could be interesting (but with an £8Bn market cap - well outside the remit of this board).

Northamber (LON:NAR) Interim report meanwhile is almost hilarious with its forthright candour.

"It is refreshing to be able to open a report to shareholders with an overdue sense of delivered achievement."
"Not only is it pleasing to report an improvement, but gratifying when the constituent elements of that improvement vindicate our policy of constantly moving towards more specialised, technical and higher margin products. "
(turnover up 9% , GP up 8% and operating losses more than halved.)

Outlook :
"Whilst now moving faster in a better, and we hope a right, direction, the current position is far from satisfactory. Each step forward appears to be thwarted by adverse happenings undermining the confidence of our customers' ultimate users, which hampers achieving the goals and targets we set for ourselves.

Nevertheless we will continue to strive and take advantage of every opportunity to take the company forward, with a return to profitability when we can make use of the accumulated pre-tax losses, for the benefit of all shareholders.

Realistically, we cannot be over-optimistic on short term results but more hopeful than not that those improvements we have shown might continue as we move through 2018 and beyond."

So, I think I'd take that as a profit warning then - nevertheless I really warm to the language used.

At a market cap of only £7m - clearly again outside of the remit here and an SR of only 21 probably not of interest anyway, but I do like the honest views on performance and prospects.

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lemonjar 14th Feb '18 8 of 32

In reply to post #315203

Ah yeah indeed, forgot to think that. Thanks in any case, & agree with your comments. They acknowledge the regulatory environment a couple of times in their update, generally saying the right things. Partly my take is they've obviously developed a very capable trading technology that's able to scale up, to do that I think you need to have very solid software engineering. With the money this is now generating it gives them options, e.g. diversification, OEM deals, acquisitions. All entirely speculative on my part, I just think good dev + lotsa money = possibilities (including avoid being curtailed by regulation.)

I bought a stake a month ago when it peaked so happy to see it now go above that on today's update.

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Housemartin2 14th Feb '18 9 of 32

In reply to post #315218

Water Intelligence (LON:WATR) Thanks for this Gromley. I thought it was just me that was being irritated by the language. It seemed to take a long time to cover the ground. It maybe we are both just curmudgeons however !
Long £WATR

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veganvader 14th Feb '18 10 of 32

Morning Paul, would be interested in hearing your thoughts on the cash call announced by  Galliford Try (LON:GFRD) this morning.

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Paul Scott 14th Feb '18 11 of 32

In reply to post #315238

Morning veganvader,

Sorry, Galliford Try (LON:GFRD) is over £800m market cap, so outside the scope of a small caps report.

Regards, Paul.

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Calahan 14th Feb '18 12 of 32

In reply to post #315263


Galliford Try (LON:GFRD) was over £800M at yesterday's close, but it's well under that market cap now when you factor in today's 19% drop (at time of writing).

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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