Water Intelligence - The Long Story

No news and unremarkable volumes. Highly rated, illiquid small caps simply got hammered today.

Down over 18% today - cant seem to fond any news relating to why the share price would fall by such a margin - thoughts?

Hi Rustbucket,

Yes, although I flagged it to them weeks ago, the Stockopedia EPS forecasts are still incorrect.

The full set of figures are shown below (although, obviously, my projections should not contribute to the Stockopedia consensus).

Water Intelligence (LON:WATR), shares are down 7.5% today, on no news I can find. Quite a decline since the placing in November @ 1200p. 

I topped up this morning. 

Are the Stockopedia broker forecasts since incorrect?

I agree there are numerous errors in the data, I have noticed some such 52week high share prices. Yes they have been fed the wrong data but when checked the data was incorrect. Maybe not under Stockopedia control.

But then we had the big glitch on the quality ratings, because the F score was not available, which affected about 20% of stocks, this resulted in large falls in the Quality scores which then pulled down the Stockrank score. This should have picked up by Stockopedia not by subscribers some days later. It came to light on Sylvania Platinum (LON:SLP) When this came to light, we should have been warned there was a data issue but nothing, some people sell when the Q drops below a certain figure.

Then the print facility, which shows the stock report every month, the prints went missing for around 6 months on some stocks and then on others for a few months, this affected around 30% of stocks, this can’t be restored apparently, so if look back for previous reports, you may find some large gaps. If I had not reported maybe it will still be happening.

You should report it.

The broker forecasts for Water Intelligence (LON:WATR) in the StockReport are wrong, as are the figures for the one and three month movements. There are two brokers covering WATR - Dowgate Capital and WH Ireland. The 'Analyst Consensus' chart rather absurdly says "analyst name withheld' when you click through the '2 brokers' box. I don't believe this is at all likely to be true.

The forecast EPS for 2021 is given as 27.2c but the two broker forecasts are 26.9c and 27.1c. The forecast EPS for 2022 is given as 29.9c but the two broker forecasts are both 32.3c. The movements table suggests that EPS is trending flat or down, whereas forecasts have moved resolutely up, in practice.

The financial tables show broker forecasts for 'net profits'. Quite why they would do this, I cannot fathom; nobody refers to net profits, and broker forecasts always focus on pre-tax profits, not post-tax. Indeed, the latest note on WATR from WH Ireland shows an upgrade in projected pre-tax profits on both 2021 and 2022, but does not even give net profit figures. How does Stockopedia allow for that?

I know that the provision of this data is outsourced, but that does not free Stockopedia of responsibility for its accuracy. And using net profits as a measure is a dumb decision all of their own.

These sort of issues are not unique to the Water Intelligence (LON:WATR) StockReport, and I would suggest that they are more the norm than the exception. This is an area where Stockopedia really need to up their game. Their subscribers are using this information to inform investment decisions. If they cannot provide reliable data, it should be clearly flagged that it may not be correct and cannot be relied on.

The key numbers in the interims had already been published in the half-year trading update in July, buy they did actually contain some surprises for me; specifically, gross margin was materially better than I expected and operating costs were equivalently higher.

This has a double benefit for forecasts, given the rapidly growing revenues. Improved gross margin floes straight through to the bottom line, whilst operating costs diminish relative to revenue due to the effects of operational gearing. Overall, this is very beneficial for my valuation, which is now 1,329p, based on a 90th percentile PE multiplier. I think this is reasonable, given Water Intelligence (LON:WATR) spectacular growth record and prospects.

Broker forecasts remain absurdly prudent, in my opinion. The table below compares my figures to the broker consensus (WH Ireland and Dowgate Capital).

Good progress continues to be made in improving gross margins. This is obscured in the published figures by the change in mix away from high margin franchisees to lower margin corporate franchises and insurance business. The table below clarifies the picture by tracking historical and projected (my estimates) margins based on the 2021 H1 business mix.

Overall, I remain very happy with the progress of Water Intelligence (LON:WATR) and am looking forward to what I anticipate will be a very positive Q3 trading update in October.

This update reflects the H1 trading statement published on 29 July, as well as the franchise reacquisitions, new national insurance account and fundraising announced earlier in July.

My revised forecasts are shown below, with the broker consensus figures in brackets. Note that net cash deducts deferred considerations as well as borrowings.

# Revenue: ................. 2021 $53.3m ($47.2m) .... 2022 $59.7m ($55.5m)
# Adjusted PBT: ......... 2021 $7.7m ($6.1m ......... 2022 $10.0m ($7.5m)
# Adjusted EPS: ......... 2021 32.0c (27.8c) ........... 2022 42.6c (34.2c)
# Net cash: ................ 2021 -$6.7m (-$8.2m) ...... 2022 $0.6m (-$3.6m)

The broker consensus is based on the analyses by WH Ireland and Dowgate Capital. I believe that both are unduly conservative on revenues and that a material top line upgrade is almost certain for 2021 and 2022.

I suspect that the variance in adjusted earnings occurs because the brokers are not allowing for the nil paid options held by the chairman.

The share price has been incredibly strong recently and stands at 1125p at the time of writing. In order to justify that valuation, WATR needs to be valued at the 90th decile PE ratio multiple. I don't think that is unreasonable, given its stellar past performance and clear future potential.

At this level, I consider WATR a HOLD. Governance remains a concern, however, and this is not a share for risk adverse investors.

Comparison between my valuation model to the figures in the recent trading statement is encouragingly close.

- Revenue $24.7m vs. $24.5m modelled
- Statutory PBT $3.8m vs. $3.8m modelled
- Adjusted PBT $4.2m vs. $4.1m modelled

I hadn't adjusted the model for the recent acquisition and fund raise yet, so can't get a comparison on pro forma net cash.

Drilling down to segment level, corporate franchise revenues were ahead of my forecast and insurance B-to-B sales were behind. The latter is somewhat surprising, given the success in adding new national insurance accounts over the last year; I guess it just shows that they take a while to scale.

Neither of the two brokers providing coverage have upgraded, although both have indicated likely upgrades in future. This, frankly, leaves their current forecasts for 2021 looking rather foolish, with implied H2 revenue below H1, in spite of the very strong upwards trends and the benefit of a full period in H2 from recent franchise reacquisitions.

I will work on more realistic projections over the weekend and publish here when done.

Thanks, pgs501, I appreciate the feedback ... and hopefully there is still a way to go here.

I just wish my CSSG thread had shown similar success!

Hi Effortless Cool. I would just like to say thank you for this article and continual updates over the last 4 years. This whole thread is a brilliant example of a well-researched investment thesis playing out as hoped over a multi-year time horizon. At the time of your original article (June 2017) the share price was around £1.32 and today we are at £8.36, so I think it can only be called a success. Your continued comments on new updates when they occur have been really helpful. Articles (and the follow-up comments) like this are what make Stockopedia great.

The segmental adjusted operating margins continue to show a very positive pattern of progression for 'US corporate-owned stores' and there are now signs of material benefits from operational gearing coming through on the 'International corporate activities segment'.

Following the 2020 full year results and the various updates and acquisitions during 2021, I believe that the current broker forecasts are extremely cautious and I expect upgrades as the year progresses.

A very positive Q1 trading update this morning.

https://www.investegate.co.uk/...

WH Ireland have "conservatively" upgraded:

We upgrade conservatively this morning by 5% and see significant further upside in line with our long-standing conviction on this stock that management guidance is conservative but performance has been and continues to be excellent, considerably narrowing the valuation as seen in the rear window.

I'm somewhat behind on updating my own projections here but will try and catch up and arrive at a set of more realistic projections over the weekend. Reflecting both recent corporate activity and strong performance, my expectation is that these will be ahead of the market consensus.

Had just put this on my watch list a week or so ago after looking into this company with a view to buy. Read its latest news this morning after checking the chart over 6% rise. Then have read your very interesting thread, it appears this is going onward and upward.

The table of adjusted operating margins by business segment is shown below, updated to reflect the 2020 interims:

Although the overall adjusted operating margin continues to track up nicely, the underlying picture is even more encouraging.

Margins on franchise royalty income trend flat, as would be expected. Similarly, franchise-related activities trends flat to down, reflecting the growth of the low margin insurance sourced business.

The interesting bit is the corporate-owned stores. This is the fastest growing revenue segment and also displays fast-growing  margins. Even in the 2021 projection, however, these remain well below the margins achieved by the external franchisees, indicating considerable potential upside to come.

The international business has seen low but improving margins in recent years. Despite a small 2020 setback from COVID, these are likely to grow with revenue into 2021.

Dowgate Capital have initiated (paid for) coverage with a very good 36-page summary of the business (registration required).

https://dowgatecapital.co.uk/wp-content/uploads/2020/09/Water-Intelligence-September-2020.pdf

Interesting and great analysis - new to Water Intelligence (LON:WATR) but hold Amiad Water Systems (LON:AFS) (since 2015 in price 120 though traded batches in and out).  On the surface Amiad Water Systems (LON:AFS) looks much better value to me right now but has none of the momentum of WATR, which I am slipping onto my watch list.  Have you any views? 

I have updated the analysis of adjusted operating margin based on a standardised business mix, as set out in post 63, to reflect the year-end results and to extend the projections by 12 months. The strong underlying improvement in margins remains apparent.

A decent set of full-year numbers set out I the trading statement issues this morning, pretty much in line with my expectations.

https://www.investegate.co.uk/water-intelligence--watr-/rns/2019-full-year-trading-results/202002100700074106C/

Broker forecasts for 2020 (as shown on Stockopedia, anyway) are going to need a substantial increase. I am currently forecasting revenue of $34.6m and EPS of 22.5c, and expect to upgrade as the year progresses.

Howard,

I have already almost doubled my money here, even after the recent fall in the share price. Based on the 2019 H1 financials and events since, I currently value Water Intelligence (LON:WATR) at 393p per share and believe that there is a strong likelihood of further substantial increases in that valuation through the business continuing to implement its strategy successfully. I simply don't see that sort of potential anywhere else in the market, so why wouldn't I be keen?

I seek high returns from my investments and have a high risk tolerance, and Water Intelligence (LON:WATR) fits with that profile. It is clearly not a suitable investment for those with a low risk tolerance.

Cheers, rhomboid. There are certainly very valid bear arguments here, most notably poor governance, dominance risk and a weak finance function. I view investing in Water Intelligence (LON:WATR) as a calculated risk. It has paid off for me so far, and I believe that the odds are still strongly in my favour, but I watch it very closely.

What a fantastic thread...really interesting ...thanks for the insights into a company that fascinates me...I held it a long while back but couldn’t get comfortable with governance & the slightly grandiloquent tone to RNS...but it looks to be delivering for shareholders just fine without me!

Operating margins at Water Intelligence (LON:WATR) have fallen from an average of 11.3% over the period 2012-2016, when revenue was dominated by franchise royalties, to an average of 7.5% over the period 2016-2018, when corporate franchisees have been the largest component of revenue.

Superficially, this seems mediocre, even though the decline in margins has been more than offset by the growth in revenues. However, drilling down to segment level gives a much more positive perspective. This is illustrated in the tables below, where green cells are actuals and red cells are my projections.

The first table shows revenue by segment.

It can be seen the corporate-owned stores and franchise-related activities (insurance company sourced business above a base level of c. $1.5m) have been the main drivers of revenue growth to date and that this will continue to be the case in the future, per my forecasts.

The next table shows what I have termed ‘adjusted operating margin’. This is as close as I can get to operating margins at segmental level, based on the published information. The table below shows the adjustments required to get from the ‘adjusted operating margin’ to the real operating margin, and is shown for context only.

The most interesting thing to note here is the rapidly increasing trend in adjusted operating margin on the corporate-owned stores. As that revenue stream has scaled up, the adjusted operating margin has increased every period from 2.1% in 2017 H1 to 15.6% in 2018 H2. My projections take only limited credit for this trend, at this stage.

Additionally, the franchise-related activities segment also shows improvement over the last three periods. It is too early to call this a trend and I have not anticipated further improvements in my projections at this point.

Finally, I show the progression of the adjusted operating margin with business mix effects removed. This is achieved by applying segmental adjusted operating margins achieved in each period to the 2019 H1 business mix.

The improving underlying trend in the historical data after adjusting for business mix is demonstrated very clearly here, as is the limited credit for this taken in my projections.

The charts scale properly on the new site.

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.

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.

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.

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.

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.

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

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

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

Allowing for the Portland reacquisition and, at the same time, incorporating a couple of other small refinements to the model, has not made much difference to my valuation, which is now 378p. Of course, the price has collapsed since I last posted, so Water Intelligence (LON:WATR) has moved from 'Hold' to 'Buy' territory for me. I have put my money where my model is, and added another 4,951 shares on Friday.

The reacquisition definitely raises the probability of 2018 beating forecasts, since finnCap rather absurdly, haven't adjusted their 2018 figures to reflect it. I am now projecting 2018 revenue of $23.9m versus broker consensus of $21.7m (a 10% beat).

Water Intelligence (LON:WATR) active again, buying up certain northwestern franchises to complete a nationwide network for its corporate-owned franchisees.

https://www.investegate.co.uk/water-intelligence--watr-/rns/reacquisition--of-portland/201810090700043465D/

The bought-back franchises generated $1.05m of revenue in 2017. That equates to a 10-15% increase in corporate-owned revenues. There will be a corresponding small (c. $100k) decrease in franchise royalty income. The $0.35m of profit these franchises produced in 2017 means this transaction will produce a material benefit to the bottom line. The announcement states it is immediately earnings-enhancing.

Thanks EC as always for you updating

I have now updated my forecasts to reflect the detail in the recent interim results. I have extended the modelling to a full valuation but, given the rapid growth of this company and the lack of history, do not present the results with any great conviction yet.

I do feel I have got a decent handle on revenue, however. I'm projecting $23.6m for 2018, versus the broker forecast of $21.7m. Now that finnCap have opened up their research to retail investors (thanks for the tip-off, Paul Scott), I am able to see the breakdown of the broker forecast by segment. To be honest, I think the finnCap figures are daft, with all segments except Corporate-owned stores projected to show lower revenues in 2018 H2 versus 2017 H2. All-in-all, I am confident of a beat for 2018. My 2019 revenue forecast is $26.0m (finnCap $24.4m).

My normalised EPS projections are 13.4c for 2018 and 18.3c for 2019. finnCap have 11.2c and 13.3c, respectively.

My valuation is 379p, based on an adjusted PE ratio of 25.5, which is the mean for shares classed as Speculative, Small Cap, High Flyer on Stockopedia.

sharmvr,

The trend on gross margins largely reflects the gradual transition from the franchise model to the corporate store model. As such, I expect it to continue, rather than reverse, but to be more than outweighed by the corresponding top line growth. Also admin expenses relative to turnover are already trending down, and I expect that to continue too, to the benefit of operating margins.

Any idea why the shares are down over 8% today, can't see any news, now around 360p. I tried to buy some some but no market.

Hello Effortless Cool.

A really good initial post if I may say so. Followed up with some interesting posts over the last 12 months (of which I have been oblivious to, unfortunately)!

It certainly seems a good company Water Intelligence (LON:WATR) and a good "keeper" as an investment. Agreed, the price is no longer value at a 40 odd multiple, but I like the model, especially the franchising with the buy-backs to operate as hubs. Additionally, most of the companies I have held that have done well in the longer term, ended up with a very high PEs (for example Fevertree, now over 70).

As a Johnny-come-lately, would it be really selfish of me to say the dip of 8.5% today has presented a bit of a buying window for newcomers :-)

Thanks again for the info. Really well done. I think I will open a position on Monday or Tuesday (when I feel the slight dip is over).

Cheers,

Mark.

Cheers, sharmvr.

As to what happened today, I blame Pete!

Effortless Cool - your analysis on this company is fantastic and most appreciated.

Do any readers have any insights as to the share price fall today (don't see any news (other than this board) and I would suggest this is a vagary of an illiquid stock) - personally I am tempted to top up, other than valuation, which is approaching levels I am not entirely comfortable with.

I hold this company, thanks in no small part to the analysis Effortless Cool presented. I liked it in February and bought for substantially higher in May, when I came to terms with paying up.
Personally, I think this company is still early stage and has a large global market (while also doing something good).
Share the view (I am not a big fan of investing in companies that have a chart like Water Intelligence (LON:WATR) but do like being a holder of such companies.
Personally, I think given the illiquidity on Water Intelligence (LON:WATR) it does not really make sense to trade in and out - whilst I will likely take profits as opposed to ride it all the way to a 100 bagger, I agree that this is a long term lucrative opportunity.

Pete,

That's a very good question and one, I'm sure, that is exercising a lot of Water Intelligence (LON:WATR) shareholders at present.

For my part, I am happy to continue to hold. Although the shares no longer scream value in the way they did when I first purchased, the story that I bought into remains intact, i.e. the possibility, even probability, of significant annual growth for many years into the future.

Also, the £65m market cap may seem high compared to current sales, but it still leaves plenty of scope to multiply. It is too low for many institutional or private investors to be interested in it, and the company remains almost invisible in the wider market. It has never been mentioned in the Investors Chronicle or Shares Magazine, and I have never seen a newspaper tip for it. In so far as Water Intelligence (LON:WATR) has a fan base, it seems to be restricted to Stockopedia subscribers who, whilst high on quality, are low on quantity. At some point I expect the share to be noticed somewhere, with a consequent boost to the price.

My view is likely coloured by past experience. I once owned 300,000 shares in a company called Lo-Q (now accesso Technology (LON:ACSO) ). Like Water Intelligence (LON:WATR), it started as a micro-cap with a small PI fan base and minimal profile beyond that. It did very well, and I gradually sold out of my investment into the rise, eventually ten-bagging. (It remains my most profitable share to date). However, after I sold out it continued to rise and rise and rise. It now has a market cap of £727m versus revenue of £99m and, if I had held onto my shares, I would have 100-bagged. What happened? Well the story remained intact, the PI fan base widened as the media noticed it, and institutions started to buy in when it grew large enough to merit their attention.

There is, of course, no guarantee that Water Intelligence (LON:WATR) will follow a similar path, but I am ready to give it the opportunity to do so.

I am sure all holders here have been happy holders in this share however a quick question on what people's views are on appropriate valuations for rapidly growing businesses like Water Intelligence (LON:WATR).

If we take EC's revenue prediction of $24m as fair this would imply a growth rate of 36% compared to 2017 which is pretty great. Based on today's FX rates of 1:1.27117 we have £18.9m sale and given the Market cap is £65m this gives us a P/S of 3.4 or so. I have had a great ride with Water Intelligence (LON:WATR) but at what point do people believe the impressive growth is fully priced in and risk starts outweighing reward?

I fully appreciate the "run your winners" mantra and this has definitely run but has the share price caught up with, or even overtaken, the impressive growth we have seen?

Pete

My H1 projections held up pretty well against the figures in the recent H1 trading statement. Small shortfalls in Franchise Royalty Income and Corporate-Owned Stores Revenue were more than offset by a surplus in International Corporate Activities; Franchise-Related Activities was spot-on.

Revising my projections to reflect this latest information, I have shaded my 2018 estimate up to $24.0m (was $23.9m), representing a significant excess over broker consensus of $21.7m (per Stockopedia).

Profit is rather harder to forecast on the available information, but I expect it to be at least in line with the $1.7m broker consensus.

The starting point for valuing this is obviously projecting revenue. Consensus for 2018, per Stockopedia, is $21.7m. I believe that this, representing growth of 23% versus 2017, is materially too low.

The first quarter trading update showed revenue of $5.3m. Since year-end, Water Intelligence (LON:WATR) has added one more national insurance company contract (4 Jan) and bought in franchises in Louisville (7 Mar), Bakersfield (15 Mar) and South Florida (15 May).

My projection is $23.9m (up 36% on 2017), made up as set out below.

First, the easy part, Franchise Royalty Income. This chart (and those others that follow), show actual figures for each half year to 2017 H2, projected figures for the following four half years, and the fitted trend to the historical data.

This revenue stream is extraordinarily predictable – almost like an inflation-linked annuity. Revenue in this segment is trending up at a consistent 5% per annum, in spite of the fact that the franchisee base has been regularly cannibalised by acquisition into the corporate franchise segment.

Corporate-owned store revenue is, unsurprisingly, a lot harder to forecast due to the high level of acquisition activity in recent years.

The q1 trading update reported growth of 67% versus the prior period. I have assumed 60% growth in H1 and H2, reflecting the three acquisitions mentioned earlier, plus a full contribution from Indianapolis (7 Jun 2017) and North Virginia (8 Aug 2017). I have not anticipated any further purchases and assumed growth of 10% in 2019, consistent with the substantial investment being made in recruitment and training for the corporate franchises.

The Franchise-Related Activities segment is also hard to forecast, mainly because the potential of the business coming through the two insurance channels is not yet clear.

In the absence of better information, I have assumed $2.5m for 2018 H1, increasing by $0.2m per half year period.

Finally, revenue from International Corporate Activities is hardest of all to predict, since there is no reliable history to project from.

I have, (cautiously, I hope), assumed fairly slow growth from the level reached in 2017 H2.

I have set all of this out in some detail to promote discussion and challenge and, as a result, be able to improve my forecasts, so please go ahead ….

Effortless

Thank you so much for attending the AGM yesterday and for taking to trouble to write up your notes. Like yourself, I am a holder from around 120p (although my shareholding is slightly smaller than yours!). It's great when a member of the Stockopedia community goes to the trouble that you have to educate and inform.

I've been impressed with the delivery on strategy so far and, like you, this has been a core long-term holding for me as I continue to see good growth prospects in the market.

Regards

Paul

Thanks EC for taking the time to give a précis of the post AGM discussions with PdS. All useful information to holders (as I am!)

The Water Intelligence (LON:WATR) AGM took place at 11:30 on 19 June in the offices of Weil, Gotshal & Manges, 110 Fetter Lane, London. The only representative from the company was Patrick deSouza, Executive Chairman. Two advisors from FinnCap were also present. I was the only shareholder that attended.

The resolutions were swiftly approved and the FinnCap representatives left to attend another AGM. Mr deSouza kindly offered to continue the meeting on an informal basis to discuss the company and answer my questions.

Note that this is a precis (Mr deSouza talks a lot!) of our conversation and represents my understanding of what was said. I obviously cannot guarantee that my understanding is accurate.

I first asked about the end game for the development of the corporate franchise business – how much more potential was there to grow this and how would the corporate network and the franchisee network work alongside each other in the long-term.

Mr deSouza’s view was that the market was sufficiently large and fragmented that was plenty of room for both networks to grow for the foreseeable future. He pointed out that the corporate franchises were significantly more profitable for shareholders, generating margins of ~30%, as opposed to the 6% royalty payable by the franchisees. He agreed on the value of the reliable income flow from the franchisee network, however, and indicated that he would seek to grow this from $6m per year of royalties to $8m-$10m, whilst continuing to prioritise growth of the corporate franchise network.

I then asked about the business-to-business work carried out through contracts with insurance companies. I wanted to understand how this was distinct from the normal business and why it was grouped with product and equipment sales to franchisees in the segmental analysis.

Mr deSouza explained that these two insurance arrangements came through a specific web-based channel with built-in workflow monitoring capability. It had taken two and a half years to convince the first insurer to sign up for this arrangement but, having now proven the concept, he had high hopes of scaling up this side of the business further, both in the USA and potentially, internationally.

I had assumed that the business-to-business channel was lower margin than normal business; however, Mr deSouza corrected me on this. The insurer paid the standard charge for the work carried out plus a fixed fee for each case. This was attractive for them because the plumbing market is so fragmented that it worth paying extra for access to a reliable service provider with close to nationwide coverage whose employees had all been subject to criminal records checks and other relevant controls.

I also asked Mr deSouza to consider making some enhancements to the financial reporting, specifically:

• Including like-for-like data on segmental revenue. This is particularly important to show the underlying performance in the highly acquisitive corporate franchise segment.
• Including cost of sales data in the segmental analysis, to enable investors to calculate gross margin at segment level.
• Issuing preliminary results on a fixed date, rather than fully audited results at a late date that has generally been missed. Mr deSouza highlighted the complexity and length of the audit process, due to the franchisee structure and the multi-national nature of the business.

I also flagged to Mr deSouza that the implantation of MIFID II meant it was now very difficult for private investors to access the FinnCap research on Water Intelligence, and asked him to consider commissioning regular ‘paid for’ research.

Mr deSouza was receptive to all of these suggestions although, to be honest, I don’t expect to see any improvement in the timing of the issue of the final results.

Overall, Mr deSouza was very bullish on the prospects for the company, and I remain a happy holder.

A very interesting AGM today. I was the only shareholder there and Patrick deSouza was very generous with his time in talking about the business and answering my questions.

I'll write up a summary and post it when I get the chance, and will also update some of the information and projections in the header.

Stockopedia has finally updated the broker forecasts although, unfortunately, they are clearly wrong.

  Broker Forecasts                                   31st Dec 2018                                 31st Dec 2019

Hi Pete,

I don't think that the Stockopedia broker figures are reliable. FinnCap seem to be the only broker covering Water Intelligence (LON:WATR), and they produce regular forecast updates but the broker consensus EPS shown on Stockopedia never budges. I don't know if this is an operational error by Stockopedia or perhaps they are having trouble accessing FinnCap research post-MiFID II?

I'm working through updating my own forecasts now, and will publish them when done. I'm not as quick as FinnCap, however, who published their update this morning. You can get hold of those, if you wish, by taking out a trial subscription to Research Tree.

A very encouraging q4 update this morning that seems to show opportunities being grasped successfully and to introduce no new negatives. Revenue was above my (deliberately conservative) projections, and that will drive my valuation up somewhat. I am going to hold off doing a full model update until the results are issued in May, however.

https://www.investegate.co.uk/water-intelligence--watr-/rns/q4-trading-update-and-corporate-development/201802140700038036E/

Paul Scott provides an excellent assessment of the trading update, along with new broker forecasts, in today's SCVR.

https://www.stockopedia.com/content/small-cap-value-report-wed-14-feb-2018-watr-hss-hsp-otmp-315143/

He correctly highlights the risks involved in investing in small, illiquid companies. For me, however, this is one of the attractions of this share.
- Its smallness means that there is potential for it to 10-bag yet still be a small-cap.
- Illiquidity will benefit holders if and when the market notices the growth story here and rerates accordingly.

The annuity-like contribution from the franchise business leaves me confident that Water Intelligence (LON:WATR) will survive any economic downturn. With only surplus funds invested, I feel able to ride out any adverse consequences of illiquidity, in the strong belief that the underlying value of the shares will persist even if the price, for a period, does not.

In February 2017, Water Intelligence (LON:WATR) signed a contract with one of the top-5 insurers in the USA to provide adjustors to pinpoint water leaks and minimise collateral damage claims.

https://www.investegate.co.uk/water-intelligence--watr-/rns/national-insurance-agreement-signed/201702060700080516W/

Today, they announced a similar arrangement with another top-5 US insurer:

https://www.investegate.co.uk/water-intelligence--watr-/rns/second-national-insurance-agreement-signed/201801040700039115A/

These are serious companies - the figures below are based on 2015 premium:

1. State Farm
Direct Premiums Written: $59.361 billion
Market Share: 10.09%

2. Allstate
Direct Premiums Written: $30.18billion
Market Share: 5.13%

3. Berkshire Hathaway
Direct Premiums Written: $29.967 billion
Market Share: 5.09%

4. Liberty Mutual
Direct Premiums Written: $29.848 billion
Market Share: 5.07%

5. Travelers
Direct Premiums Written: $23.2 billion
Market Share: 3.94%

https://www.insurancebusinessmag.com/us/news/breaking-news/these-are-the-top-25-propertycasualty-insurance-companies-in-the-us-32630.aspx

Water Intelligence (LON:WATR) have also agreed a strategic relationship with Flo Technologies:

https://www.investegate.co.uk/water-intelligence--watr-/rns/new-strategic-relationships/201712210700050053A/

Flo produce a device to monitor water usage and so help detect leaks early.

https://meetflo.com/how-it-works/
https://meetflo.com/products/flo-home-water-system/

The potential to market this in conjunction with the insurers is clear.

A very satisfactory Q3 trading statement issued on 2 November.

https://www.investegate.co.uk/water-intelligence--watr-/rns/q3-trading-update/201711020700032720V/

Momentum in revenue growth was somewhat impacted during Q3 by the hurricanes and wildfires that hit the US but, overall, seems to be running ahead of my (deliberately prudent) projections. The main engine of growth remains the corporate-owned stores. I am now forecasting $17.1m (consensus $17.2m) for 2017 and $20.6m (consensus $19.0m) for 2018.

The trading statement advises that profit remains in line with expectations due to investment in growth. For the first time, however, they give us some detail on this investment, with the money going towards building the Australian operation (lots of swimming pools) and increased marketing to acquire national accounts (a key engine of growth). Moreover, a number of regional training centres will be built over the next three years to ensure a continued supply of trained technicians. I have revised my post-tax profit projections to $0.8m for 2017 (consensus $0.9m) and $1.5m for 2018 (consensus $1.2m).

Cash of $0.9m is consistent with my projection for year-end.

I still maintain that the revenue growth and potential here supports an adjusted PE ratio of 25 and, on that basis, my valuation increases to 229.9p. At 53% above the current price of 150p, I continue to view Water Intelligence (LON:WATR) as a STRONG BUY.

Disclosure: I have added to my holding in the last few months, and now hold 84.4k at an average of 121.2p

thank you for such a comprehensive analysis Effortless, this has been on a watchlist and has now hit a price alert - does anyone have any thoughts on why the precipitous decline?

I have revised my forecasts to reflect the latest trading update. Both franchise revenue and corporate-owned store revenue were ahead of my forecasts, so i have updated them. I now forecast 2017 revenue of $17.0m (vs. $15.0m consensus) and 2018 revenue of $18.8m (vs. $16.5m consensus). I suspect that I am still erring on the prudent side here, and am certain that the consensus (just finnCap, in reality) figures need upgrading.

The update reiterates that projected profit for the year "remains in line with expectations", so I have trimmed my admin expense assumptions to derive projected net income of $0.94m for 2017 and $1.05m for 2018.

The effect of these changes is to increase my valuation from 183.2p to 208.7p, which represents a 70% premium to the current share price of 122.5p

This is an excellent post, thank you for taking the time to write it.

I've been looking into this company this weekend and I like it for a number of reasons:
- A boring niche
- Company growing fast but SP isn't crazy given the current bull market
- It might also be counter-cyclical possibly? Water leaks probably not cyclical unless there's a long period when people are buying fewer swimming pools for example. I am trying to reduce the number of cyclical shares I hold at the moment so this might fit nicely in my portfolio.

The negatives are that:
- I am slightly worried that the exec chairman is all-powerful and don't like the look of the Plain Sight conflict of interest. I don't even understand why he owns the company through both his personal shareholding and Plain Sight. Anyone considered this?
- I am not really sure if there is serious competition. I imagine it might be from water companies themselves but they have a customer relationship with Water Intelligence (LON:WATR) so perhaps they are not such a competitive threat.
- Their technology doesn't seem that sophisticated (to me as a lay person though) so perhaps the barriers to entry aren't steep.
- Reporting of results seems to be a long time after the year or half-year end but I see this is improving and they plan to publish H1 2017 results to end of June in September, which seems a bit better.
- Intangible assets look a little high. Does anyone have any thoughts on this? Balance sheets are not my expertise and perhaps it is related to the franchise model?

Very positive trading update out today and I have picked up another £10k worth on the back of it.

https://www.investegate.co.uk/water-intelligence--watr-/rns/trading-update-and-acquisition/201708090700034582N/

Revenue of $8m was ahead of my expectations of $7.8m. The cash figure of $1m is also above my expectations, but I doesn't mean much in the absence of any update on borrowing levels (they should give us net cash/debt). I view a fundraising as very unlikely, unless it is to facilitate a material acquisition. Absent that, WATR can simply use the reliable cash flows from the franchisee business to fund their continued investment in the fast growing direct business.

Got it now! Chart added - thanks, Ramridge.

Thanks, both, but I'm at work and can't download an app, and can't work out how to do the first part of Ramridge's suggestion, let alone the second.

If anyone can tell me how to embed an Excel graph in a post, I would be very grateful.