Nice numbers from DUG released this morning. My thesis was always this company has valuable IP and a lead on its competitors. In summary, DUG takes undersea seismic surveys and gets significantly more insights from them with it's MP-FWI technology, meaning Oil and Gas explorers have a lot more certainty when they drill for oil. Given it can be a $50m to $100m exercise for an oil and gas explorer, I think that DUG's insights are worth a lot, and hopefully offshore oil companies are starting to come to the same conclusion. DUG was crossing to profitability when I bought it (in 2023) and on that basis the valuation was compelling - that was a few years ago and the price hasn't run up as much as I'd like, but I think the business is doing what I hoped it would. So valuation is still compelling in my view (if you're doing your own calc, and you should - bear in mind it reports in US$, but listed in A$). I was surprised the market didn't rerate DUG in line with the recent jump in oil prices, but that's Mr Market for you. Great to see the lift in HPC revenue, some big investment in that division starting to pay off as well. Still more to play out with this stock and my thesis and I'll continue to hold. Their IP for data centre cooling is pretty interesting too. Held IRL and SM.

Announcement from DUG this morning:

My thesis is that DUG has valuable IP and has advantages over its competitors in interpretation - with some interesting side-IP in DugCool and DUG Nomad. I am hoping this is the start of a transition to a SaaS business...

Held IRL & SM

Rich

02802104 - DUG 1-5-24.pdf

DUG's announcement today attached, from my earlier post's looks like my thesis is intact, demand for High Performance Computing is strong and their cost base shouldn't rise proportionally with revenue. Good growth is 2 of the 3 business lines with revenue up 39% and EBITDA up 24%. US$5.6M FCF for the quarter isn't bad either, so nice to see the EBITDA translating to cash flow. Having said that I was more impressed with the operational leverage last half (profit rose faster than revenue last quarter which is always preferable). This dip in leverage is explainable. They are still being weighed down by having to hire compute power, so hopefully with the new install done by June this will improve, but maybe not full impact till Q1FY25 from what this announcement says. So I'll be looking for that October update to see if the thesis really remains true. Still has net cash on the balance sheet (c. US$5m), which is always a plus...and management maintain a strong holding, another plus.

Hold IRL and SM.

Been watching DUG for a while and started a position IRL this week.

By Bull/Bear case below:

Positives

In an interesting niche, assisting mainly Oil & Gas companies to examine propects, using data analytics on large data sets.

Just coming into profitability in FY23, on the back of really strong revenue growth, particularly in the US.

If (and it's an if) trajectory continues the PE at 23 does not seem particularly high.

Nice operating leverage - employee and operating expenses only up about 10 to 12% in FY23 on 50% higher revenue - obviously hoping they can continue with that ratio!

Minimal debt and starting to get to good ROI, cash flow was strong.

Negatives, things to watch

Stability for CFO, looks like there's been quite a few through there in last 2 years - would be looking for that to not change again anytime soon.

Was this year's revenue recurring or one off - looks to be spread across multiple contracts at least which is encouraging, but hard to tell on my skim of the annual report.

Long term, will there continue to be demand for the core product? - not sure, but they are looking to take their skills into other areas.

Overall, the positives and valuation got me across the line, that and High Performance Computing is an area I've been working with recently and I believe there's some very interesting applications to come (particularly in the Quantum space). The SP is up 100% over the course of this year, but still more to go IMO.

Rich