Water Intelligence - The Long Story

Thursday, Jun 22 2017 by
42

Water Intelligence (LON:WATR) came to the Aim market in 2010, through a reverse takeover of Qonnectis plc. Its principle asset is the American Leak Detection (ALD) business, which it operates on both a franchisee and corporate-owned basis.

Background

As described in the 2010 prospectus:

http://www.waterintelligence.c...

“ALD focusses on the accurate, non-destructive detection of all types of leaks including hidden water and sewer leaks, together with repair and other related services. ALD’s service technicians utilise proprietary training and specialist equipment such as infrared cameras and acoustic devices to pinpoint leaks, employing less invasive methods to find the source of the leak compared to breaking or drilling holes in walls and floors. Because leaking water can travel along water lines or leaks may be pinhole size along a water pipe, in many instances, ALD’s service offerings have the potential to reduce the repair costs for the consumer compared with typical plumbing solutions as they do not rely on a “trial-and-error” method of exposing whole sections of pipes to detect leaks”.

Also taken from the prospectus:

“[ALD] believes that its competitive advantages include its full range of service offerings, its brand and over 30 years of experience, the specialised equipment it uses, the training it provides its franchise owners and technicians working from business run directly by ALD, its marketing system and the key relationships it has with channel partners such as insurance and restoration companies. For certain segments of its business, ALD may face competition from others, including independent plumbers, repair services, other leak detection companies and services”.

“[ALD] is aware of certain other companies or businesses that offer leak detection services. However, as far as it is aware, these businesses tend to be small owner-run operations without the franchise or branding presence of ALD”.

The Franchisee Business

The ALD franchisee business is the core business of Water Intelligence.

ALD’s revenue model is principally derived from franchise royalties. Franchisees pay monthly royalties based on a percentage of gross monthly sales, ranging from 6% to 10%. It also derives revenue from the sale of new franchises and supplying its franchisees with revenue and equipment at a modest mark-up.

As of year-end 2016, ALD had 96 franchisees, the vast majority being in the USA. System-wide sales for 2016 were approximately $75m, generating franchise royalty income to the Group of $5.5m.

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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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 »

LSE Price
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Mkt Cap (£m)
54.0
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62 Posts on this Thread show/hide all

Effortless Cool 18th Oct '18 43 of 62

In reply to post #410099

Yes, interesting, but not necessarily competition. Potentially just another weapon in the Water Intelligence (LON:WATR) leak-finders arsenal.

http://uk.businessinsider.com/mit-grad-made-a-robot-to-detect-water-pipe-leaks-2018-9

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Housemartin2 19th Oct '18 44 of 62

In reply to post #410139

Potentially just another weapon in the Water Intelligence (LON:WATR) leak-finders arsenal.


Are you saying that this is something Water Intelligence (LON:WATR) already have ? Is the Australian  company Detection Services (who are trialling this technology) a company related to Water Intelligence ? If so I had missed that.

Detection within the pipe via suction changes seems a v good concept to me ( who is not an engineer)

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Effortless Cool 19th Oct '18 45 of 62
1

In reply to post #410304

No, what I meant is that Water Intelligence (LON:WATR) do not generally own the technology that they use. What they do is supply the skilled workforce that uses it to find leaks.

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Housemartin2 20th Oct '18 46 of 62

In reply to post #410319

Thanks EC. Understood

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Effortless Cool 4th Dec '18 47 of 62
4

A very good q3 trading update this morning, underpinning my forecasts. I have shaded up revenue forecasts to $24.4m for 2018 and $29.0m for 2019, with no change in my valuation (378p). FinnCap still lag with their revenue forecasts for both years.

Extremely happy with progress here.

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sharmvr 4th Dec '18 48 of 62
1

In reply to post #424568

Was waiting for an update to the article from you EC and defer to you on judgement here.
I would have thought they can break 25m if they can deliver same run rate as Q3 ($7m in Q3) with one further franchise acquired recently but I am a fuddy-duddy boring accountant and a huge fan of conservatism!
Also I like that margin is going in right direction. Also, having lived there a few months, I can say Australia take water conservation very seriously so certainly be a market open to their product. Will be watching for development in OZ because I think that will be a good marker for whether there is real value in their service or just another business.
I hold (not in same size as Mr Cool) - have considered topping up a few times and may well do if there is another bout of unexplained volatility, which given US, might be tmrw!

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Effortless Cool 4th Dec '18 49 of 62
1

In reply to post #424578

Hi sharmvr (spellcheck tries to change that to 'charmer', which is certainly snappier),

I'm pretty sure they won't reach $25m. Looking back to last year q4 was lower than q3 for franchise royalty income and I assume that corporate-owned stores will show the same underlying trend. I don't think that the addition of the Portland franchise for q4 will be enough to get them there.

I agree with you about Australia, and this is certainly something that Pat DeSouza seems to have picked up on at their convention, so hopefully we will see some significant progress there next year.

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sharmvr 5th Dec '18 50 of 62

In reply to post #424613

certainly been called worse!!

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Effortless Cool 5th Feb 51 of 62
1

An encouraging update from Water Intelligence (LON:WATR) this morning.
1.Buy-back of the Ontario franchise, adding $400k+ to 2019 revenue and establishing first presence in Canada.
2.Expansion of the franchise network with the sale of franchise territory in Youngstown, Ohio. Step in a strategy of expanding into greenfield locations to make the business more attractive to insurance partners with national coverage.
3.Financial support to the Idaho franchisee to accelerate addition of leak repair and municipal capabilities, beyond simple leak detection. The one-stop-shop solution again being attractive to insurance partners.
4.UK-developed diagnostic sewer technology being rolled out to the US franchise network.

The announcement also hints at a favourable 2018 q4 update, which is expected some time in the next few weeks. I'll wait for this announcement before updating my projections.

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Effortless Cool 17th Mar 52 of 62
3

An excellent q4 update from Water Intelligence (LON:WATR) on Tuesday.

  1. Revenue of $25.3m, ahead of broker (and my) forecast.
  2. PTP of $1.8m, ahead of broker (and my) forecast.
  3. Net cash of $2.6m, ahead of my forecast.
  4. Very bullish on start and outlook for 2019.

I've been slow updating as I have been trying to enhance my valuation model to take more accurate account of deferred payments on acquisitions. I'm not entirely happy with this yet, but it's almost there.

I am forecasting 2019 revenue of $28.7m, versus broker forecast (per Stockopedia) of $27.4m. My adjusted net profit of $2.7m is much higher than the broker's $2.2m. My net cash projection for end-2019 is $3.5m.

Note, however, that Stockopedia is showing the finnCap projections from finnCap who, I believe, have ceased coverage since Water Intelligence (LON:WATR) changed its NOMAD and broker from them to WH Ireland in January this year. WHI are providing coverage, but it is not directly available to PIs and, for some reason, is not being picked up in Stockopedia's consensus figures. I have flagged this with Stockopedia.

My revised valuation has increased from 378p to 406p, which is 35% above the current price of 300p.

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Effortless Cool 17th Mar 53 of 62
3

5c8e9d4cf037cPicture1.png

Here's the updated franchise royalty revenue history and projections. This 'index linked annuity-like' revenue stream is very high margin and offers robust downside protection.

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Graham Ford 18th Mar 54 of 62
1

In reply to post #458783

Nice one EC.

I’m a bit puzzled at how remarkably consistent it is. I would have thought growth would be more variable. I’m also wondering what the influence of the franchise buy backs by corporate are on this. Wouldn’t that tend to make the growth less consistent?

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Effortless Cool 18th Mar 55 of 62
2

In reply to post #459173


Hi Graham,

You make fair points. I guess Patisserie Holdings (LON:CAKE) has reminded people (for the first time since Madoff, perhaps) that consistency may be an indicator of fake numbers. I hasten to add that I do not believe that to be the case here.

The table below shows the development of half-yearly franchisee royalty income from 2012-2018, and also gives the growth rate against the prior equivalent half-year.

I have a few observations.

  1. Royalties are based on franchisee revenues and, thus, will be a lot more consistent than franchisee profits.
  2. The period covered does not include a recession, so consistency has not been tested in hard times.
  3. The royalties are paid by a multitude (approaching 100, I think) of franchisees. This, absent macro effects such as recession, will tend to produce a consistent flow of cash as individual successes or failures will have only marginal impact.
  4. The nature of these businesses, each involving many relatively small jobs, means revenue at individual franchisee level will generally be consistent and predictable.
  5. There has been a level of variability, with period-on-period growth ranging between 4% and 10%.
  6. The upward trend reflects: (a) growth in opportunities (e.g. more pools); (b) addition of new franchises; and (c) maturation of existing franchises. I suspect they have also grown market share.
  7. Reacquisition of franchisees does affect revenue in this segment, and I believe that is shown in the low growth in 2017 H2 and 2018 H1, when some larger franchisees were bought back in.
2012 H1 1 2,270  
2012 H2 2 2,076  
2013 H1 3 2,389 5%
2013 H2 4 2,221 7%
2014 H1 5 2,547 7%
2014 H2 6 2,370 7%
2015 H1 7 2,715 7%
2015 H2 8 2,506 6%
2016 H1 9 2,893 7%
2016 H2 10 2,650 6%
2017 H1 11 3,174 10%
2017 H2 12 2,751 4%
2018 H1 13 3,312 4%
2018 H2 14 3,001 9%

Monetary figures are in $k

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Effortless Cool 28th Jun 56 of 62
2

An interesting AGM meeting today. Seems like more of the same in the pipeline, plus a few extras. I'll write a brief summary in due course, but have some odds and ends to tie up first.

It was nice to meet silverfern there too, doubling the PI attendance form last year.

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Effortless Cool 29th Jun 57 of 62
3

Business continues to boom. From the AGM statement:
- "... the company ... is on course to pass its next milestone of $30m in sales during 2019". [WH Ireland forecast currently $29.7m]
- "... currently, we have a healthy backlog of jobs across the country".

Drivers for future growth:
- Reinvestment. "We will be reinvesting in training more technicians in our proprietary technology to satisfy strong demand ...".
- More B-to-B relationships: "Because of our unique distribution base in 45 states of the US, we anticipate more national accounts later this year and next".
- More reacquisitions. "... this year we have already executed strategic reacquisitions of franchises in Niagara, Canada and South Atlanta, Orlando and Tucson in the United States".
- More franchisees. "... as we create more valuable market for our franchisees through opportunities to exit, we are seeing stronger demand from third parties to buy a franchise. ... we will likely sell more franchises in select areas going forward producing opportunities for high gross margin sales".
- Insuretech. "... our insurance company partners would like our American Leak Detection (ALD) business to help sell and install new technology products geared for monitoring leaks and evidence of water damage".
- Repair work. This emerged from the AGM discussion. The founder of ALD wanted the business to concentrate solely on the detection of leaks. The customer then would get a plumber to effect the repair. Several of the more successful franchisees did not follow this route, and extended the role of their franchise to include repairs. (I must admit, I had assumed that repairs were part of the package for all the franchisees, as it is such a natural extension of the detection work). Water Intelligence (LON:WATR) is now encouraging other franchisees to extend the scope of their work in this way and, indeed, made a loan to one franchisee to buy a plumbing business. There is significant scope to grow franchise revenue through expanding repair work.

I remain a very happy holder.

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Effortless Cool 15th Jul 58 of 62
2

This post is primarily intended as a response to questions from "Shanklin" on the ADVFN thread, but is hopefully of wider interest.

  • What revenue growth and margin assumptions have you built into your model please?
  • Do you believe you are being pretty conservative?

I'll do revenue first and will pick up on margins in due course, when I get time.

My 2019 forecasts by segment are shown below, along with 2018 comparatives in brackets.

  Franchise royalty income ...................   $6,460k   ($6,265k)

  Franchise-related activities ................   $8,200k   ($6,154k)

  Corporate-owned store ...................... $13,345k ($10,141k)

  International corporate activities ......   $3,082k   ($2,908k)

The first of these I am very confident in; franchise royalties show very stable, predictable growth and seasonality.

5d2cddea6c354Revenie1.png

The second may err on the prudent side, in that I'm assuming a significant deceleration in growth rate versus recent periods. This segment is very hard to forecast due to the sporadic addition of new insurance company and other corporate clients.

5d2cdea9e6e5cRevenue2.png

Corporate store revenues are also hard to forecast due to the regular reacquisition of franchisees. I try to make appropriate direct allowance for these as they happen, and don't see the forecasts as either prudent or imprudent.

5d2cdf272d65dPicture1.png

The international forecasts show little growth over 2018, which assumes continuation of the flattening trend seen in 2018 H2, up just 5% over the prior period. I am not expecting material growth here, absent acquisitions.

5d2cdfb6555fbPicture2.png

So, overall, perhaps some conservatism related to uncertainty over insurance company income, but not really otherwise.


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shanklin100 16th Jul 59 of 62

Hi EC

Thank you for posting your revenue estimates.

Based on the graphs and your comments, IMHO your extrapolations on graphs 1,3 and 4 look completely reasonable.

On graph 2, I am curious as to why you employed a straight trend line through all the data points back to 2012, when there seems to be a change in the rate of revenue changes from H1 2015 onwards... ...albeit I understand that deciding on the appropriate approach is made more difficult by ongoing franchise buy backs.

What would you think of calculating a trendline using the data from H1 2015 onwards, and extrapolating forward from the last data point using the slope of that line?

Maybe that would be slightly optimistic in calculating conservative numbers, in which case you could dial back the extrapolation line slope?

Hope this helps.

Thank you again & Best Regards, Martin

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Effortless Cool 16th Jul 60 of 62
2

Hi, Shanklin, and thanks for the feedback.

The second chart is for "franchise-related activities". Up until 2016 H2, this was solely goods and services supplied to the franchisees by the franchisor. In 2017 H1, they signed up their first insurance company, and that relationship started accruing revenue to this segment. Since then, they have signed up two more insurers and Home Depot (I believe).

So there is a slow-growing and relatively predictable revenue stream, overlaid with a fast-growing and hard to forecast one. Although I show an overall trend line, I don't actually use it for this reason. In due course, I will likely try and split these two revenue sources and project them separately.

Eventually, I would expect the insurance channel revenue trend to flatten out at the 4-5% per annum level, consistent with the underlying experience of the franchisees. However, in the short-to-medium term, it will grow materially faster than that as insurer relationships contribute for a full period and continue to grow to scale. Hence, extrapolating the steeper part of the curve indefinitely will be too optimistic.

Of course, the business seems confident of adding further B-to-B relationships and, also, reacquiring more franchisees. Both of these offer material upside to my revenue projections.

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Effortless Cool 22nd Jul 61 of 62
2

For margins, ideally I would like to project at segment level, as the different segments have very different cost of sales and operating cost characteristics. Unfortunately, however, the published segmental information does not give a breakdown between costs of sales and administrative expenses, just a segmental profit figure. I therefore take a two-pronged approach, looking at company-level and segment-level data separately, and then adjusting assumptions to produce a close reconciliation.

Company-level cost of sales is hard to forecast due to the constantly evolving mix. Franchisees transferring to corporate-owned reduces gross margin, growth in B-to-B work relative to B-to-C reduces gross margin. Thus, gross margin is trending down, but it is near-impossible to differentiate any underlying trend from business-mix effects.

My forecast selections on gross margin are below the medium-term downtrend but above the short-term downtrend, so perhaps err on the optimistic side.

fc1361a8b4879ea40d2cf08d8506d0a2dfadcc331563796862.png


For administrative expenses, I back out other income, depreciation, amortisation, share-based payments and non-core expenses, all of which I forecast separately. This leaves me with figures for “underlying administrative expenses”. Relative to revenue, this shows pronounced but reducing seasonality and a strong downwards trend as operational gearing kicks in. I have assumed continuation of this trend.

cf808469c96b8326007b57725c7635668c76cfab1563796876.png


My alternative approach looks at segment profit (which totals to company profit, after adjusting for “unallocated head office costs” and “one-time costs”) relative to segment revenue to produce what I term an “adjusted operating margin” (AOM) for each segment.

For Franchise Royalty Income, this showed consistent strong seasonality and a slight downwards trend until 2018, when those historical relationships broke down entirely in the two half year periods. The overall figure was consistent with prior years, however. For projection, I have assumed that 2018 was a one-off and that the seasonality will reappear. My projected AOMs are lower than any previous year apart from 2014, and may err on the prudent side.

b136234ebc57180deff3e5e7d0f3536a91de976a1563796895.png


The AOM for Franchise-Related Activities also shows a pronounced seasonality in the earlier years, but that has diminished to practically nothing by 2018. I have assumed that this near-flat OEM continues in my projections.

f7105f594d61281d61d5c9a7b02b7af7e21407141563796920.png


AOM for Corporate-Owned Stores has been erratic but is trending up, with the least few periods sitting above trend. I have assumed this recent pattern continues in my projections, which is consistent with the management outlook. Seasonality is somewhat obscured by noise in the data, but I have assumed continued weak seasonality.

fa2b35f5417d2eef3d766c70ad9d7d53df70b7431563796933.png


The emerging AOM for International Corporate Activities shows an upwards trend and clear seasonality. I have assumed that these will continue.

2a26a61364bf30eee394191c173ce989616d79051563796950.png


I reconcile adjusted operating costs forecast on this segmental basis back to the equivalent figure at company level (which introduces an additional assumption as to the proportion of unallocated head office costs in the forecasts). The company level projections drive my forecasts although, at present, using the segmental basis would produce better results. Given the significant uncertainty in the forecast numbers, I am happy to have this prudential indicator

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Effortless Cool 22nd Jul 62 of 62

The charts scale properly on the new site.

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