Consensus community valuation
$0.215
Average Intrinsic Value
33%
Undervalued by
Active Member Straws
#EMS acquisition
Last edited 6 months ago

There's a lot of detail related to this acquisition, and others have already summarised the main points.

Key considerations for me:

  • An extremely large takeover (technically, a reverse takeover) that radically changes the business mix. EVS is now essentially a noise monitoring business that has a relatively small odour and wastewater segment. That being said, they'll be looking to provide a more holistic solution to customers going forward.
  • Very dilutive. When accounting for options, there are around 1,127m shares. That gives the company a market cap of ~$225m
  • The combined entity will still be loss making, although it is targeting a doubling in revenue over the next 3 years to ~$100m, with EBITDA margin of 15-20%.
  • With $15m in cash, post transaction, it should have enough cash to make it to profitability (if projections are indeed realised)
  • Cross sell opportunity is significant -- but this is often touted as an acquisition rationalisation, and not always realised..
  • EMS has a history of growth, and is expected to see a 9% lift in sales for the current year.
  • Macquarie will retain an 8% holding (14% if all options are exercised) and will be the largest single shareholder. It will refer potential clients.
  • Big potential, but similarly big risks in terms of integration and realsing cross sell potential.

I've updated my valuation (see my company report)

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#Integration Update
Last edited 2 months ago

Envirosuite has announced that it expects the recent (massive) acquisition of EMS to be fully integrated at the end of May -- on buget and on schedule.

This process has identified $8m in cost synergies and a further $3m in budgeted savings. These are expected to be realised by the end of FY21. 

If realised, that's quite material. I estimate it reduces cash costs by ~19% (and will boost pro-forma operating margins).

EVS also believs it will boost revenue growth potential, will see a restructure of senior exectuve team from the 2 businesses, and a consolidated product road-map.

Importantly, EVS reiterated its goal of being EBITDA positive on a monthly run-rate basis by the end of FY21.

A group presentation that more thoroughly outlines the new business will be released at the end of May.

Full announcement is here  

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#EBITDA positive target
Added a week ago

Envirosuite has brought forward its target for EBITDA breakeven, saying they expect to reach this target by the end of March 2021 -- 3 months earlier than previously advised.

This is a result of ongoing cost reductions and new projections for one-off and recurring sales.

It will be an important milestone if achieved, and i suspect will help bring about a re-rate of the company's shares.

ASX announcement here

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#Company Presentations
Added a month ago
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#Company Update
Last edited a month ago
  • New acquisition of EMS Brüel & Kjær Holdings Pty Ltd (EMS) - successfully completed integration phase.
  • $58 million revenue - EBITDA expected to be positive by FY2021
  • New CFO (Matthew Patterson, coming from Macquarie Group) & COO (Jason Cooper) announced.
  • Currently sitting on $24million in cash.
  • Since ##China Update (18/02) - $5million contracts attained in Water Quality; team of 12 staff set-up.
  • $7.5million in key contracts since 1 March 2020.
  • More information at: https://www.asx.com.au/asxpdf/20200604/pdf/44jd085lwp88sy.pdf
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##China Update
Added 5 months ago

18/02/2020

Envirosuite provided an update on its China venture since it established operations last year.

EVS China now has 10 people, including a local general manager. The previously announced strategic agreements with local partners has supposedly contributed "substantially" to the sales pipeline, the qualified portion of which represents around $12m.

EVS reported a maiden sale of $270k to a wastewater plant, and more sales are expected in the coming months. With the SaaS model still unfavoured in China, new sales are expected to involve a large upfront capital component, followed by a few years of smaller maintainance and software fees.

The recent takeover of EMS gives Envirosuite 4 existing contracts in China for the related solution, and there's potential for further expansion here.

This news is not material from a financial perspective, but at face value it seems as though the move into China has started well.

Management certainly have a lot going on -- ingesting the much larger EMS while simultaneously expanding into a new (and often challenging) geography and overseeing product integration and development is no easy task!  

You can read the full announcement here

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#Contract wins
Last edited 4 months ago

23/3/20

Envirosuite has announced a material contract win valued at $2.8m for the first phase of regional water quality project.

EVS will supply 375 third party water analysers at 11 treatment plants and is expected to lead to the provision of software solutions.

This sale was not in the previously disclosed sales pipeline.

The value of the deal includes the cost of the equipment, and EVS said it could not disclose its margin due to commercial sensitivity (but i doubt it would be better than 40% at best)

What's most interesting, is that this deal was fast-tracked due to increased regulatory requirements following the coronavirus outbreak. Indeed, Envirosuite said it had experienced an accelerated demand in the China market.

All in all, for a company targeting $100m in sales in the coming years, this isnt a massive win, BUT it is very encouraging in that it shows an ability to continue generating sales in these unusual times AND that the demand for their product is increasing due to increased regulary standards. It's also encouraging to see more traction in the China market.

You can read the full ASX announcement here

.

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#new shareholders
Added 6 months ago

17 January 2020:  ASX Announcement by EVS of massive acquisition (of EMS Brüel & Kjaer Holdings)

Envirosuite to acquire EMS Brüel & Kjaer Holdings Pty Ltd

Key Highlights (excerpts) continued - see "#Jan 2020 EMS Acquisition" straw for the bulk of the details concerning this acquisition.

...continued...

 

New Shareholders

On completion of the Transaction, Macquarie will hold approximately 8% of EVS shares on an undiluted basis which will make Macquarie the largest single EVS shareholder.  This percentage would increase to approximately 14% if all options on issue (including those to be granted to Macquarie) are exercised.  Macquarie has a right to a nominee on the EVS board (“Board”), subject to completion of the Transaction.

On completion of the Transaction, Macquarie and EVS will enter into a two-year Referral Agreement under which Macquarie will procure certain introductions and/or referrals from the Macquarie Capital Business Group (being that part of the business carried out within Macquarie Group Limited, its holding companies and its and their subsidiary companies known as “Macquarie Capital”).  The Board believes that gaining such a strategic shareholder will help accelerate EVS’s global expansion significantly.

Spectris will hold approximately 1% of EVS shares on an undiluted basis (approximately 0.9% of EVS shares on a fully diluted basis).

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#EVS enters All Ords Index
Added 4 weeks ago

Envirosuite will enter the S&P ASX All Ordinaries Index on June 22.

Doesn't alter the buy thesis, but in the short run it should help support the price as index funds are forced to buy. Longer term it may help with liquidity too.

 

View Attachment

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#Jan 2020 EMS Acquisition
Last edited 6 months ago

17 January 2020:  ASX Announcement by EVS of massive acquisition (of EMS Brüel & Kjaer Holdings)

Envirosuite to acquire EMS Brüel & Kjaer Holdings Pty Ltd

Key Highlights (excerpts)

  • EVS to acquire EMS - a leading global environmental noise solutions provider 
  • The combination of Air Quality, Noise and Waste and Wastewater creates a comprehensive and world class environmental technology platform
  • The acquisition provides scale and opens new industry and geographic distribution channels for the expanded solution offering
  • The Transaction is expected to complete at the end of February 2020, and is subject to shareholder approval
  • Acquisition funding secured after the successful completion of an underwritten institutional placement to new and existing investors


Envirosuite Limited (“EVS” or “the Company”)  (ASX: EVS) is pleased to announce that it has signed a binding agreement to acquire all of the share capital of EMS Bruel & Kjaer Holdings Pty Ltd (“EMS”) (“Transaction”). EMS is a leading global environmental technology group, headquartered in Melbourne, with over 400 customers in 40 countries and approximately 200 staff. EMS specialises in environmental noise and vibration monitoring and is the recognised market leader in addressing airport noise globally.

The underwritten institutional placement (“Placement”) to new and existing institutional and sophisticated investors will, on settlement, raise gross proceeds of A$70 million. Bell Potter Securities acted as sole Lead Manager and Underwriter for the Placement.

Transaction Details

EVS will purchase EMS, on a cash-free, debt free basis, from its shareholder group, comprising the majority shareholders Macquarie Corporate Holdings Pty Ltd (“Macquarie”) and Spectris Group Holdings Limited (“Spectris”), as well as the EMS founders whose nominees hold a minority shareholding.

EVS has agreed to a total consideration pursuant to a share sale agreement of:

  • $70m cash, to be paid net of EMS debt and subject to a working capital adjustment, to Macquarie as at 50% and Spectris as to 50%;
  • 80m new EVS shares, with 25m shares to be issued to Macquarie, 10m shares to be issued to Spectris, and 45m shares to be issued to the minority shareholders; and
  • 95m options over EVS shares, to be granted as follows:
    • 75,000,000 options to Macquarie with an exercise price of $0.20 per share and an exercise period of three years from the date of grant; and
    • 20,000,000 options to nominee entities of the EMS founders, with an exercise price of $0.25 per share and an exercise period of three years from the date of grant.

In addition, EVS has agreed as part of the Transaction to issue to Macquarie 55m EVS shares as consideration pursuant to a referral agreement to be entered into subject to and on completion of the Transaction as set out below.

All consideration shares are subject to a twelve-month escrow period.  Any shares issued  pursuant to the exercise of consideration options will be escrowed for the balance of the twelve months from the date of option grant.

The consideration shares and consideration options to be issued by EVS as part of the Transaction consideration are fixed in number and not subject to recalculation at completion of the Transaction.

Completion of the Transaction is subject to applicable EVS shareholder approvals, including for the issue of the consideration shares and options.

Funding arrangements, including Share Purchase Plan

The $70m cash component of the Transaction consideration will be funded via the Placement, pursuant to which 350m EVS shares will be issued to institutional and sophisticated investors at $0.20 per share and which is underwritten by Bell Potter Securities.  

The Company will seek to raise an additional amount of approximately $5.5m via a placement of approximately 27.8m EVS shares at $0.20 per share to institutional and sophisticated investors including directors Hugh Robertson and Chairman David Johnstone (subject to shareholder approval), members of the EVS management team and their networks.

This placement will be managed by EVS directly (not underwritten) and the proceeds will be used to fund costs associated with the Transaction.

The Company also today announces a Share Purchase Plan (SPP) providing each shareholder the opportunity to subscribe for up to $30,000 worth of EVS shares at a price of $0.205 per share. The price has been set as close to the Placement share price as the rules for SPPs allow, being a share price that is no less than 80% of the volume weighted average price of EVS shares in the 5 trading days leading up to the date of this announcement. The SPP funds will be provisioned for additional working capital to support the integration and growth of the combined group.

A notice convening a general meeting of EVS will also be released today seeking the approval of EVS shareholders to resolutions pertaining to the Transaction and the funding arrangements.

 

--- continues in "#new shareholders" straw (due to 5,000 character limit on individual straws) ---

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#China Launch & Capital Raise
Last edited 4 months ago

Envirosuite has announced a binding agreement to initiate its launch into the Chinese market.

The deal is with Mr Zhigang Zhang, the GM of Beijing BHZQ Environmental Engineering Solutions, a person envirosuite described as "a prominent leader in the environmental protection sector". He'll also be offerred a board seat.

Mr Zhang will purchase 50m shares at 8c each ($4m worth). He'll also get 25m options to acquire shares at 15c each, which expire in March 2022 and vest on the condition that a minimum of A$10m in cumulative revenues are received by Envirosuits Chinese subsidiaries before the end of calendar 2021. (for context, EVS is targetting $12m in recurring revnues by the end of FY2020)

Another 15m of options will be allocated to China employees under the same terms.

Much of this is subject to shareholder approval at the upcoming AGM.

The $4m raised is before costs, which include 1.25m options (under the same terms as above) for the executing broker. As a percentage of funds raised, seems like the broker will do pretty well out of this...

Envirosuite said that the $10m revenue threshold was NOT a target or forecast -- rather just a performance hurdle. 

Still, the market opportunity in China is obviously vast and the Government there has a clear focus to address air and water issues. Definitely an exciting prospect.

But is it a good deal?

Well, the issue price (8c) seems overly generous to me -- although the strategic value of this deal clearly has big potential. It's hard to do business in China without the right partner...

The deal, in its entirety, will also be reasonably dilutive to existing shareholders. Accounting for all options, there'll be a further ~24% increase in the share count.

Further, the new China subsidiary will undoubtedly extend the cost base. It's entirely possible that any additional revenue earned in the medium term is more than offset by the increased costs.

I expect the market will react favourably to the news when trade resumes, and not without some justification. It's just worth keeping in mind that execution is everything -- and far from gauranteed. 

I'll likely adjust my valuation in the coming days, once more is known.

Read full ASX announcement here

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#New Contract Wins
Last edited 3 months ago

27-March-2020:  Material win in China - Smart Water Solution

Just to book-end the week, one on Monday, and this one on Friday.

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