Another interesting little business that i discovered via its 4C this week, EVZ Limited operates in the engineering and energy services sectors in Australia and Asia. It operates through Engineering, Energy, and Water segments. The Engineering segment designs, manufactures, and installs silos, cooling towers, pipe spooling, and pressure vessels, as well as large steel and smaller bolted steel plate tanks for use in the water, petrochemical, and chemical industries; and fabricates structural steel. This segment also engages in the installation and provision of ongoing support and maintenance for its products. The Energy segment designs and installs constant load power stations, base and back-up power generation equipment, communications equipment, marine installations, and sustainable/clean energy solutions, as well as offers mobile generation capabilities. It engages in the service, maintenance, and hiring of various generators and associated equipment. The Water segment is involved in the design and installation of syphonic roof drainage systems to various buildings, such as airports, shopping centers, and sporting venues; supply and installation of metal panel tanks and prefabricated hydraulic systems. The company also provides design, construction, on-site installation, maintenance, and shutdown of engineering services to the mining, wood chip, petrochemical, aluminum, glass, cement, defense, and agriculture industries. EVZ Limited was incorporated in 1984 and is based in Docklands, Australia.
It has about $10m in cash and a market cap of $19m so its valuing the whole business at under $10m, made $1.5m profit last year so thats a pretty low multiple! FCF last year was also about $1.5m so strong conversion rate.
Should do about $2m NPAT this FY based on guidance for H1.
Share register relatively illiquid, 75% in top 20. Directors & executives have reasonable skin in game.
Company indicated some contracts due to roll over and there may be some margin expansion as a result.
So the upside thesis is that they have some consistent growth in revenue, which seems to be true, and they also get some margin expansion due to contracts rolling over on more favourable terms and "operational improvements". The unknown is the margin expansion.
This seems to be supported here because H1 2023 sales of $49m delivered bulshit earnings of $2.1m, they then did $111m for the FY, and $3.7m bullshit earnings, so the 2nd half was $60m for 1.7m bullshit earnings and now they are saying H1 2024 will be $60m rev $2.5m bullshit earnings. Given the contracts havent rolled over yet, that would mean significant gross or operating margin improvement?
(This highlights a red flag with the business, they do use Bullshit earnings (EBITDA) as a metric. There is no way a business that has obvious D & A expenses should ever be using this metric, but the use of it is endemic sadly.)
So without the benefit of any potential gains from contract renewals we are already seeing improvement in margins.
The thing is this is not the sort of business I would consider for the SMSF, as its not good enough to generate decent ROIIC, but it does seem intrinsically cheap with reasonable upside if they can execute the narrative, so worth considering for the personal portfolio.
The downside risk is the narrative is not executed and either the growth flattens or the margins dont improve, but its mitigated by the current cheapness of the business to some extent. The other question I have on the downside is, why has it taken so long to turn this around, its been around for 40 years!
If I were to take a position my thesis here is that the business executes the narrative and has a rerating as a result of higher margins and sales growth and I would then look at exiting the position.
