Recent Events
At first glance, the vast majority of investors likely dismiss this company completely under the assumption that it would be capital heavy and likely growing in lumpy chops when contracts are won. These things aren’t untrue, but what is missed is that a significant chunk (~70%) of their revenue is recurring. As an example, mines will need a continuous monthly supply of their OptiFlox technology to separate minerals from ore, a process which requires enormous amounts of water.
The events that unfolded in the past 6 months saw the stock fall from 0.95 to 0.45, losing nearly 60% of its value. Less look into what happened:
- The company announced last year some trials with very large clients (namely Canadian Oil Sands) that would have resulted in significant opportunities. The company was quiet for months about these, and with the lack of news, investors starting selling off the stock thinking these deals were lost. The company never provided any updates on these, the assumption is that these deals have been lost. One could read a warning signal here, but we may also accept that even businesses with excellent solutions cannot win all opportunities.
- With sentiment already on the decline, the company released weak Q1 results in October. Sales were down 30%. But wait, shouldn’t this and the above point be read as signals of a business under structural decline? My opinion doesn’t align with this. Indeed, during the harsh COVID lockdowns of Q1, travel restrictions made it impossible for them to access sites for one off-projects, 95% of their revenue were generated from ongoing recurring contracts. This business is also in verticals with very long sales cycle, not all quarters will be steady upside.
- This sent the stock in a further downward spiral.
- With a weak share price, this provided an attractive entry point for raising capital to bulk up the inventory to fund their growing pipeline of opportunities. The raise was to allow them for more vertical integration to reduce their supply chain risk. However, it appears to me that this raise was poorly handled, the communication wasn’t clear enough and a lot of investors missed the strong fundamental reasons why the raise was happening.
- In recent H1 reporting, results were positive: 32% uplift of last year’s H1 revenue. Cash receipts up 40%. However their weak Q1 results in a slimmer profit from H1 and with all the recent market turmoil, it appears most investors are missing the broader context.
- The current market is one that’s orientating more to value of profit, but the above resulted in Scidev being sold-off as a perceived early stage cash burning growth stock, which it is not.
