Here are some notes from today's meeting with CEO, Sean Halpin.

SciDev is all about water treatment solutions -- be that for materials extraction, construction or site remediation. As with EGL, they also specialise in PFAS removal.

Their chemicals and processes are proprietary and have IP protections, although they do also do more commodity-like solutions to broaden their appeal across the customer base.

They operate two business segments - chemical services (~80% of revenue) and water technologies (~20% of revenue).

The chemical services business provides proprietary chemistry that improves operational efficiency and water usage for heavy industries. The water technologies business remediates legacy contamination issues by removing harmful contaminants from water sources.

Chemicals are the major variable cost for a lot of customers in oil & gas, and SciDev's products can allegedly yield significant savings.

The relationships with customers vary by industry. Mining customers typically have 3-year fixed contracts as SciDev's products are key consumables in their core processes, providing revenue visibility. Oil & gas is more transactional. Water technologies is project-based revenue with build-operate contracts of 6-36 months.

PFAS contamination remediation is a major growth opportunity, and Sean echoed similar sentiments to Jason at EGL. Both have said the opportunity is large enough to accommodate many players --especially in the US and Europe as regulations tighten. Management is taking a disciplined approach, putting resources in place ahead of an expected uptick in demand as regulations advance. If successful, this could be transformative (but, as always, execution is key).

Sean remarked that the business is still sub-scale, but that he didn't expect a lot of increase in fixed costs given the capacity of capital equipment and facilities they currently operate.

SciDev's focus on higher-value proprietary solutions is paying off. Profit margins are expanding - specialty chemicals range from 20-40% gross margin, with water projects up to 90% in some cases. Commodity products are being de-emphasized. This strategic shift, along with operational leverage, is driving strong EBITDA growth and positive free cash flow, despite recent market challenges. The company appears self-funding at this stage.

The business is now cash flow positive, and they have ~$6m in cash available.

The business model has elements of recurring revenue which provides some visibility. Mining customers are on 3-year contracts as SciDev's products are critical to their operations. This 'stickiness' was emphasized. Oil & gas is more transactional but SciDev's unique products foster retention. Water projects are 6-36 month contracts. 

Wise capital allocation is a priority for management. Organic growth is the main focus - investing in the right products, regions and projects. Acquisitions are evaluated opportunistically to accelerate growth, add tech capabilities or build scale in key markets. The company's improved cash generation provides flexibility.

Organizational culture was highlighted as critical to success, especially during this growth phase. Management is working hard to foster shared values, engagement and innovation. The employee share plan aligns incentives. Still, scaling a specialized workforce across regions is an execution risk to monitor.

SciDev appears to have a differentiated offering in a growing market, with multiple levers for growth. The company's recent financial performance is certainly encouraging. Management seems to be taking a thoughtful approach to balancing growth investments with risk management. Key things to watch going forward include: 1) Traction in the PFAS opportunity, especially in new geographies, 2) Maintaining margin improvements and capital discipline as the business scales, 3) Any M&A activity and subsequent integration, and 4) Competitive response.

All told you have a $65m business doing ~$100m (pro-rata) in revenue, with potential for some decent operating leverage. As with EGL, there appears to be some good tailwinds. The company is on a EV/EBITDA of roughly 10x -- which doesn't seem too bad assuming the growth trajectory is maintained.

Widespread contamination of surface water and groundwater due to industrial releases of PFAS or use of PFAS-containing firefighting foams is now a major problem in the United States and globally. An estimated 200 million U.S. residents, nearly two-thirds of the U.S. population, receive municipally provided drinking water that is contaminated with PFAS

Quite staggering!

$350k per site (I think)..... $10bn TAM.... that's a lot of real estate to cover

But can they execute?

Why be bullish?

The same thesis of 2 years ago remains intact: 

• A massive Total Addressable Market that’s under growing ESG pressures and will need to increase their use of these products.
• Revenue growing in the environment of 30%
• Profitable company 
• Valuation of <2X ARR 
• Seasonality tends the favour H2 
• Whilst the downtrend is happening, the institutional investors that like this stock are accumulating: Perennial bought more in November, and AustralianSuper just a few weeks ago.

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:

1. 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. 
2. 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. 
3. This sent the stock in a further downward spiral. 
4. 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. 
5. 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. 
6. 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. 

History

Scidev first appeared on my radar over 2 years ago when Harley Grosser from Capital H Management wrote about it and other competitors. 

At the time Scidev was solely focused on separating solids from liquids. Since then, they’ve made a strategic acquisition in Highland Fluid Technology which allows the separation of liquid chemicals in water. Both of these verticals offer massive opportunities. 

SciDev delivers inaugural net profit of A$0.4m

1HFY21 Financial Highlights

~(1HFY20 -A$0.2m)

~ Record half year results;

       ~ sales of A$18.3m (+300% vs 1HFY20  A$6.1m)

       ~ cash receipts from customers of A$15.8m (+290% vs 1HFY20 A$3.8m)

~ Net cash at the end of the period of A$7.1m

~ Strong gross profit margin of 23% (FY20 17%)