Each week, I’ll be picking a random small-to-mid-cap ASX stock that I have rarely seen discussed online (personally, yes I’m aware it may have been discussed at some point in history) – and that I do NOT hold at time of writing – to cover at a glance.
We’ll have a look at what it does, some of their financials, and conduct some polling on general sentiment. The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week.
Company name: Envirosuite Ltd
Ticker: EVS
Industry: Technology
Headquarters: Sydney
Market cap: $214m
Current share price: $0.18
P/E ratio: N/A
1-year Performance: -1.49%
What they do, smoothbrain version: software to leech off the ‘green bandwagon’ and guilt companies to paying them so they can appear “Ethical”™
What they say they do, wanky version: “Our solutions empower you to unlock value beyond environmental compliance to make confident decisions that optimise operational and environmental outcomes.” 🍆👋
What they do, actual version: Envirosuite Ltd are a Sydney-based software firm who produce a proprietary suite of environmental (funny, that) monitoring technologies which provide analytics & feedback on a number of environmental factors.
Their software monitors levels of the quality of air, water, dust, noise and other Captain Planet elements that nowadays businesses need to check boxes for in order to appear environmentally compliant.
They call this ‘Environmental Intelligence’, which sounds sufficiently wanky and buzzword-y enough to show up when people Google “Environmental ASX stocks”.
Practical applications of this include deploying sensors for monitoring aircraft noise & handling public noise complaints, reporting on issues with air quality/pollution emittied by cities/neighbourhoods or individual businesses, monitoring odours from rubbish dumps, providing analytics on CO2 & greenhouse gas emission levels, etc etc.
Customers they deal with cross a range of sectors, mostly mining, construction, airports, wastewater management, and local councils/city governments. They operate in five different global regions and employ around 250 staff.
The company was previously focused largely on environmental consulting services, however have since pivoted towards a SaaS (Software as a Service) model.
Envirosuite was founded in 2006 and listed on the ASX in 2008, rebranding themselves in 2016.
What looks good:
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Let’s start with the most obvious, and not necessarily something they can take credit for: the environmental revolution. Whether through incredible foresight – or just dumb luck – they operate in a space that is currently capturing massive public and media attention; the ESG movement.
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Being directly tied in to providing software that directly serves the ‘E’ in ‘ESG gives them massive global tailwinds as more and more governments start to green-wash things and bring in further rules and regulations dictating environmentally-friendly requirements on businesses. There are also basically no other ‘Enviro-tech’ software companies similar to them on the ASX, as the rest of the listed “eco” companies are mostly oriented around physical products, agricultural research, etc.
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They are a cloud-based, Software As A Service (SaaS) business, which means Annual Recurring Revenue (ARR) is the name of the game, and their business model is based around acquiring clients once and then hoping they stick around for the long-term.
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This has both pros and cons, however the lack of need to constantly re-sell to the same people over and over again means they can focus on new acquisition. It also means they can potentially up-sell and cross-sell additional services as add-ons to existing customers once they’re satisfied with their initial use-case of the software.
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A growing portion (83%) of their most recent reported revenue was ARR, more than double that of the previous year. This was a massive jump, and was despite restrictions on sales staff from presenting/pitching, airport clients being scaled back (a key source of their revenue), etc.
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For SaaS companies, one of their key metrics is “churn”, a.k.a the rate at which current customers leave their platform (lower = better). EVS’ churn rate is only around 2%, which is very good; SaaS B2B companies typically average around 5% churn.
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They added another 44 sites utilising their software YOY (Year On Year) from 2020-21, bringing their current total to 373.
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All in all, this resulted in a 104% increase in total revenue, 179% increase in gross profit, and 56% increase in EBITDA YOY. This means they’ve had back-to-back record quarters, and ‘technically’ were profitable in the most recent quarter (barely) despite investing a LOT of money into growing their # of staff.
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EVS looks quite undervalued compared to the Book Value of its assets, particularly when compared to the tech/software industry (P/B ~1.7)
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They have no significant debt, as much of the funding was raised from shareholders and raises.
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Plenty of potential for future growth, both by attaining new clients & rolling out new products; they recently rolled out a use case of their “SewerX” sewerage monitoring software, for example, and the “water” space (& their EVS Water software) in general is a potential high growth area.
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Subjective, but IMO both their software UI and general branding are quite slick and look quite “professional” compared to some of the clunky user interfaces of some Aussie software companies/startups.
What doesn’t look good:
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Unlike many of the stocks I typically pursue (profitable small-caps), EVS are currently not profitable, and have not been for several years. This means they have had to subsist on a steady diet of capital raises after rebranding in 2016 and pursuing a growth strategy, being funded by shareholders in the hope that their revenue growth becomes more self-sustaining.
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They recently raised capital both to retail ($3.8 mill, June 2021) and non-retail ($14m, May 2021). There’s been a LOT of new shares issued, and associated dilution, as a result.
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Insider ownership isn’t particularly strong; the co-founder owns only 2% of the company, and the rest of the board only own relatively small parcels. A lot of the company is propped up by money from the general public/instos as a result.
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Has been a mixed amount of insider buying/selling over recent months; Macquarie dumped $12 mill worth in September but it didn’t appear to affect the share price much.
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Their acquisition of AqMB IP (water software) in 2020 didn’t particularly move their share price “needle” as of yet.
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Their share price has been erratic, and hasn’t really gained too much consistent momentum other than random periodic spikes upon releasing annual results, before settling back down.
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They’re not a “new” company, despite their tech seeming fancy and new-ish; they’ve been around a long while for software and haven’t taken the world by storm yet. It may yet be too soon to see if their SaaS pivot will pay off long-term.
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Looks like they may simply be “lucking” their way into the right trend at the right time, rather than getting there by their own achievements.
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They’re a bit “pumpy”, in that they look for any minor excuse to put out a ‘Price Sensitive’ announcement (check out this prime piece of fluff released to the ASX on 13 August 2021 that was literally not related to anything they achieved at all – no idea why the ASX approved it as Price Sensitive, but OK.). In the past, I’d say this was a red flag, but if there’s anything I’ve learned over the past few years, it’s that it’s better to have a company that releases constant newsflow than the Radio Silence types. I’m still putting it down here though.
Summary: This is largely a sentiment play, in that you’d be betting that EVS can continue to ride the tailwinds of the global ESG movement while capitalising on extra freedoms from post-Covid openings allowing their sales term to continue to ramp up their sales rollout – before burning too much through the latest round of investor cash.
Their strong presence in the USA means they can potentially capitalise on Biden’s sustainable/environmentally-focused infrastructure plan and approach a growing range of companies that need to appear ESG-compliant to satisfy both regulators and their own investors.
More and more US states are passing bills related to climate change, and given their already-strong presence in the country they have multiple use cases they can present to new cities, airports, and industrial businesses over there.
Fundamentally, it’s hard to say EVS looks “undervalued” when assessed as a standalone company vs. your average ASX business, however when you compare it to other SaaS businesses that operate on an average multiple of around 15xARR, let’s look at the math:
ARR: $46,500,000 x 15 = $697,000,000 market cap / 1,193,906,094 Shares on Issue
= Share price of ~$0.58.
Given their current SP is $0.18, and given what I see as their potential for growth, vs others in its space it seems like an under-loved company that is still in a pretty sexy sector (tech) and in and even sexier macro-climate (environment).
This is also the type of company that to me, with all the current tailwinds and media around its core purpose, looks like it could potentially be a prime buyout target by a bigger US tech firm in the future, which potentially adds to the upside.
Conclusion: Based on all of the above, I might personally give some more consideration to this stock sometime soon, and keep an eye out for whether they can continue on with their stated goal of 20% annual compound growth.
Company website: https://envirosuite.com/
MarketIndex page: https://www.marketindex.com.au/asx/evs
Feel free to add more DD/comments below.
Would you buy this stonk? Why or why not? Feel free to vote in the poll.
