Aqualis AQUA NO
November 06, 2014 - 11:56am EST by
ThatDu04
2014 2015
Price: 8.00 EPS 0 0
Shares Out. (in M): 44 P/E 0 0
Market Cap (in M): 51 P/FCF 0 0
Net Debt (in M): -21 EBIT 0 0
TEV: 30 TEV/EBIT 0 0

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  • Professional Services
  • Engineering Services
  • Illiquid
  • Europe
  • Spin-Off
  • Insider Buying
 

Description

For those of you able to invest in illiquid Norwegian spinoffs (so for most of you, feel free to stop reading now), I think Aqualis presents an interesting risk-reward. Aqualis (AQUA) provides engineering services to the offshore energy industry that was created through the merger of 3 separate companies in late 2013/early 2014. After its former parent merged with pharma company Weifa, AQUA was spun out to shareholders in August 2014.    

While the stock appears fairly valued on 2014 numbers, those results do not reflect the significant ongoing growth in Aqualis's employee base as Q3 14 run-rate revenues are over 30% higher than 2014 estimates. With downside to ~NOK 6 and upside to NOK 18+, AQUA provides an attractive risk-reward at NOK 8.

Capitalization and Valuation **** Note USD functional currency despite NOK share price****

AQUA has 43.7mln diluted shares for an NOK 350mln mkt cap at NOK 8 or USD 51mln. The company has USD 21mln of cash for an EV of US 30mln (NOK 203mln.). 2014 revenues should be ~31mln (EV/S=1.1x)

Upside

AQUA has quickly gained a strong foothold in the industry, more than doubling its employee count this year and signing contracts with blue chip customers including Saudi Aramco, Petrobras, Statoil, Shell, Chevron, Seadrill, Keppel etc. Conversations with employees at competitors have suggested that AQUA is already very well known in the industry and has been aggressively adding employees and customers.

AQUA currently has 166 employees, well below their near-term goal of 300-400. Given that each employee generates ~$250k of revenue, 350 employees would generate ~$84mln of annualized revenues and 13mln of EBIT at 15% margins (20% target and peers high teens). At 8x EBIT, that would justify an NOK 18 share price. It should be noted that management thinks that 500-1000 employees and higher is possible.  

Insiders have made purchases of stock at current and higher prices and have taken stock in acquisition payments with multi-year lockups that justify an NOK 10+ price. Management owns over 20% of the stock (broadly held). The company also expected the stock to trade at NOK 10 in its valuation when it was spun-off.

The company is controlled by Ferncliff, an investment company controlled by Norwegian billionaire investor Oystein Stray Spetalen. This is important because Ferncliff and Mr. Spetalen have very relevant experience in this space. In 2006, they acquired AQUA competitor Noble Denton. After building it up for several years, they sold it to GL in 2009 which they built up under a similar strategy and sold to GL in 2009 after enjoyed a ~350% return.

Downside

Currently, AQUA has 166 employees who historically have generated >$20k per month of revenue (Q3 2014 $23k per month of revenue). Thus at current levels, AQUA should generate ~$40mln of annualized revenue. At 0.5x revs (peer transaction >1x), that would justify an NOK 6.5 share price. It should be noted that the cost of the acquisitions also justify a share price of NOK 6 and the acquisitions were made when the company's involved only had 111 employees vs. 166 currently as well as a much smaller backlog of business.

AQUA also has over NOK 3 per share in net cash.

Happy to discuss further details if there is any interest in the comment section.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Continued revenue growth

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    Description

    For those of you able to invest in illiquid Norwegian spinoffs (so for most of you, feel free to stop reading now), I think Aqualis presents an interesting risk-reward. Aqualis (AQUA) provides engineering services to the offshore energy industry that was created through the merger of 3 separate companies in late 2013/early 2014. After its former parent merged with pharma company Weifa, AQUA was spun out to shareholders in August 2014.    

    While the stock appears fairly valued on 2014 numbers, those results do not reflect the significant ongoing growth in Aqualis's employee base as Q3 14 run-rate revenues are over 30% higher than 2014 estimates. With downside to ~NOK 6 and upside to NOK 18+, AQUA provides an attractive risk-reward at NOK 8.

    Capitalization and Valuation **** Note USD functional currency despite NOK share price****

    AQUA has 43.7mln diluted shares for an NOK 350mln mkt cap at NOK 8 or USD 51mln. The company has USD 21mln of cash for an EV of US 30mln (NOK 203mln.). 2014 revenues should be ~31mln (EV/S=1.1x)

    Upside

    AQUA has quickly gained a strong foothold in the industry, more than doubling its employee count this year and signing contracts with blue chip customers including Saudi Aramco, Petrobras, Statoil, Shell, Chevron, Seadrill, Keppel etc. Conversations with employees at competitors have suggested that AQUA is already very well known in the industry and has been aggressively adding employees and customers.

    AQUA currently has 166 employees, well below their near-term goal of 300-400. Given that each employee generates ~$250k of revenue, 350 employees would generate ~$84mln of annualized revenues and 13mln of EBIT at 15% margins (20% target and peers high teens). At 8x EBIT, that would justify an NOK 18 share price. It should be noted that management thinks that 500-1000 employees and higher is possible.  

    Insiders have made purchases of stock at current and higher prices and have taken stock in acquisition payments with multi-year lockups that justify an NOK 10+ price. Management owns over 20% of the stock (broadly held). The company also expected the stock to trade at NOK 10 in its valuation when it was spun-off.

    The company is controlled by Ferncliff, an investment company controlled by Norwegian billionaire investor Oystein Stray Spetalen. This is important because Ferncliff and Mr. Spetalen have very relevant experience in this space. In 2006, they acquired AQUA competitor Noble Denton. After building it up for several years, they sold it to GL in 2009 which they built up under a similar strategy and sold to GL in 2009 after enjoyed a ~350% return.

    Downside

    Currently, AQUA has 166 employees who historically have generated >$20k per month of revenue (Q3 2014 $23k per month of revenue). Thus at current levels, AQUA should generate ~$40mln of annualized revenue. At 0.5x revs (peer transaction >1x), that would justify an NOK 6.5 share price. It should be noted that the cost of the acquisitions also justify a share price of NOK 6 and the acquisitions were made when the company's involved only had 111 employees vs. 166 currently as well as a much smaller backlog of business.

    AQUA also has over NOK 3 per share in net cash.

    Happy to discuss further details if there is any interest in the comment section.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Continued revenue growth

    Messages


    SubjectPresentations
    Entry11/06/2014 11:58 AM
    MemberThatDu04

    Here is the link to their presentations which I think provide a helpful overview.

    Best,

    DBH

    http://aqualis.no/investors/reports-and-presentations/other


    SubjectRelative value
    Entry11/06/2014 11:35 PM
    Membergrizzlybear

    with almost every offshore leveraged name decimated recently (RIG, SSE, HOS) why is this a better risk reward?


    SubjectAqualis
    Entry11/07/2014 04:40 AM
    MemberBarong

    I think Aqualis interesting, but I wonder if the timing is wrong and if the price isn't already too high to justify an investment at this point. 

    My very cursory work on this assumes significant dilution as the model is to allow employees to become owners. I'm therefore assuming shares outstanding move from 43.2 to 50m by 2017. I assume 17.5% EBIT margins from 2015 and 1.3m NOK in rev per head. Headcount grows from 166 to 287 in 2017 (20% per year).

    8x EBIT on those assumptions yields a fair value of 10 NOK per share. I don't think that's compelling enough considering the current industry conditions, and I'm unsure of how to think about the cash position.

     

    On the other hand, this would be an opportune time to poach employees from competitors.Also, as you state, Spetalen, the majority shareholder, has done this before with great success (Noble Denton). The guy is brilliant, probably the best investor in Norway apart from John Fredriksen. This is smack dab in the middle of his circle of competence. 

     


    SubjectInsiders
    Entry11/07/2014 08:18 AM
    MemberThatDu04

    One of the most interesting things about Aqualis is the amount of insider ownership and purchaes.  CEO purchased yesterday.

    Best,

    DBH

    Aqualis ASA : Mandatory notification of trade

     

     

    Oslo, 7 November 2014

     

    On 6 November 2014, ALSTO Consultancy Ltd, a company controlled by David Wells, CEO at Aqualis, acquired 42'000 shares at an average purchase price of NOK 7.942 per share. After this transaction David Wells, and related parties, hold 640'122 shares in Aqualis.

     

    *****


    SubjectQuestions
    Entry11/07/2014 08:40 AM
    MemberThatDu04

    Thanks for the questions and appreciate the interest.

     

    with almost every offshore leveraged name decimated recently (RIG, SSE, HOS) why is this a better risk reward?

    1. I think the difference with AQUA is that I expect them to grow significantly over the next few years, regardless the level of offshore spending.       Thus, this is has potential upside even in a continued weak offshore environment. The balance sheet is also much better which lowers the downside risk.

     

    Barong Qs- Valuation, growth assumptions, cash usage, Spetalen

     

    1. I think my major point of disagreement surrounds the number of employees. If AQUA only gets to 287 employees by 2017, then I agree that the returns will be unsatisfactory. Over that time period, management expects to get to closer to 500 employees and possibly up to 1000.
    1. I am also a bit uncertain re your math. With 300 employees at $225k per employee per year (vs. 247k, 224k and 279k in Q1-Q3 and mgmt expectations of $250k), I get a value NOK 16 per share at 8x EBIT. Using 500 employees, I get a value of ~NOK 28. Here is my math:  

     

    Employees 300.0 500.0
    Rev per Employee per Year ($k)         225.0         225.0
    Annualized Revenue ($mln)           67.5         112.5
    EBIT Margin 17.5% 17.5%
    EBIT           11.8           19.7
    Multiple             8.0             8.0
    EV           94.5         157.5
    Net Cash           21.4           21.4
    Mkt Cap (USD)         115.9         178.9
    Mkt Cap (NOK)         795.8     1,228.5
     Shares                50               50
    Per Share           15.9           28.1
    Upside 98.9% 251.7%

     

    1. I do expect their to be some dilution but have expect it to be managed well due to the financial sophistication of Spetalen and the large share ownerships of mgmt.
    1. Agreed on Spetalen and on it being a great time to poach employees

    SubjectCash Usage
    Entry11/07/2014 08:52 AM
    MemberThatDu04

    While management would prefer to grow organically at this point, they want to have some dry powder in case they come accross a very attractive acquisition. 

    If not, I think they start paying a dividend in the mid-term.

    Overall, the presence of Spetalen gives me comfort here as well.

    Best,

    DBH


    SubjectRe: Questions
    Entry11/07/2014 09:12 AM
    MemberBarong

    Nothing wrong with the math. It's just that I use 1.25m NOK per head in revenues or about 190k per head (I USD = 6.8 NOK or thereabouts) as I'm doing the calculation in NOK. Hence the lower value. Might be too conservative - it would not be the first time I make that mistake.

    In general, I like to be involved in the stuff Spetalen does and made a bit of money in both old Aqualis ASA and Weifa ASA earlier this year (as you know, a lot has happened over the last few months). I feel that management are being extremely aggressive here and I'm just not sure I'm buying it. I'd like more of a margin of safety. But if anyone can make it happen, well...it's him.


    SubjectRe: Re: Questions
    Entry11/07/2014 09:54 AM
    MemberThatDu04

    Given the results to date, I think $190k per employee per year (using dollars ass operating currency is better than NOK in my opinion) is excessively conservative.  They have been $225k and above this year. 

    Furthermore, I think current rev per employee per year is actually understated because of the employee growth and that fact that it generally takes an employee ~3 months to get fully up to speed. 

    Completely understand the lean towards conservatism given the aggressive plans here.  While I agree that the upside is uncertain, I think ~43mln of annualized Q3 14 results and ~20mln of cash provide a heads I win a lot/tails I don't lose much scenario.

    Thanks for the interest.

    Best,

    DBH

     


    SubjectRe: Re: Re: Questions
    Entry11/07/2014 09:57 AM
    MemberBarong

    You may very well be right. Aditionally, companies of this kind are usually sold for about 2m per head, so there's a very good chance I'm being too conservative. 


    SubjectRelated - Standard Drilling trades at a 15% discount to net cash
    Entry05/19/2015 06:38 AM
    MemberBarong

    Standard Drilling, an investment company controlled by Spetalen as well as his aquaintance Dan Gold in QVT now trades at a 15% discount to net cash.

     

    • Historically, getting in on the ground floor in Spetalen controlled shells has been a good idea. Look at Clavis/Aqualis e.g.

     

    • At this level, the risk looks absolutely minimal. The company has 54.62 mUSD (405 mNOK) in cash and no liabilities and 262m shares outstanding. Annual cash burn should be about 0.8-1m using Q1 as a reference.

     

    • This company will be used for opportunistic investments in the oil service space. Who better to team up with then Spetalen, Hvammen etc? I'm in.

     

    • This might be dead money for a while, but when opportunity knocks, I am confident that Spetalen and his crew will deliver.

    SubjectAqualis buys 49.9% of Adler Solar
    Entry09/02/2015 04:52 AM
    MemberBarong

    02/09-2015 07:00:00: (AQUAAQUAO.ST) Aqualis ASA: Aqualis buys 49.9% of Adler Solar

    http://www.netfonds.no/quotes/release.php?id=20150902.GlobeNewswire.1949143


    SubjectPresentation from Pareto's Oil & Offshore Conference
    Entry09/03/2015 10:11 AM
    MemberBarong

    http://hugin.info/162549/R/1949573/708600.pdf

     


    SubjectSAGA
    Entry12/08/2015 01:41 PM
    MemberBarong

    Speaking of trading near net cash: think SAGA is even more interesting, though less liquid. Very hard to source shares, but I've managed to get a million here and there. SAGA NO trades at 2.3 NOK, and after receiving a huge dividend from Standard Drilling and selling some of its stock holdings (including some in Aqualis) I estimate SAGA has 2.7 NOK pr share in cash and 1.4 NOK in listed stocks plus other current and fixed assets worth about 0.5 NOK. Subtracting total liabilities and minority interests of -0.7 NOK per share, I think it's worth about 3.9 NOK. And there's likely 0.7 NOK per share in NOLs, too, but I don't know if they can realistically be exploited. So I think NAV is between 3.9 to 4.6 NOK per share. And Spetalen owns about 77% of it. Virtually all of the top shareholders have some previous connection to Spetalen.

    I think the reason the market hasn't caught on yet is a combination of shares being hard to come by, the very small market cap and the fact that people just look at the last reported figures where the dividend from Standard wasn't visible yet. Clearly not a stock for everyone, but interesting for private accounts and small firms, maybe. I think so anyway.

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