Morning All,

Following recent management meetings, we think Veris could be a standout microcap (VRS.ASX $0.075 Mkt Cap $30.4m). Looking forward, VRS could be approaching turnover toward $100m, and EBITDA of $10-15m, or 2-3x’s. They are the largest surveying company in Australia, and whilst not a hot sector at the moment, we like the structural tailwind of both infrastructure, resumption of residential/commercial construction and a focus on Defence projects. They have the scale and presence to compete well for the larger contracts. Following a significant and painful restructuring, they are in a good position to capitalise on this tailwind with lower debt and a structure that has improved margins across the business.

Background – Painful – Lacked Execution - Back to their roots

• Veris was a roll-up of several companies that encountered integration problems. The new CEO Michael Shirley has been fixing the problems since Feb 2020.
   
• In a nutshell, managing a largely East Coast rollup from an office in WA did not work. It did not work geographically, and the roll-up execution did not work.  The main issue has been around the management of staff many of whom work remotely in the field in challenging terrain with customers’ needs that are constantly changing. The delivery systems were poor and a lot of work that was done was billed incorrectly. This issue has been addressed with several management changes and some wholesale redundancies of middle management and finance roles. The business in NSW slipped into losses during this period but is now running back at breakeven following the changes.
   
• Elton Consulting was a profitable business acquired back in early 2018. Such was the breakdown in the execution of the roll-up strategy, this business had to be sold in late 2019 to shore up the balance sheet.
   
• Instos Lost – VRS lost its institutional base, Perennial left back in June, and Paradice and others in March/April.
   
• Michael Shirley has made a number of changes that have seen the business return to profitability despite the challenges of a Covid economy.

Looking Forward – there is plenty to start to like.

• An inflexion point was the Q1 FY21 Update back in October – key highlights below – and note this excludes uplift from any Jobkeeper payments. The backlog of projects is $40m and the pipeline of tendered projects over $80m.

Since that update, they have secured $4.2m in announceable contracts

• Aqura Technologies - $2.0m contract to supply advanced LTE equipment for the Iron Bridge Magnetite Project, a joint venture between Fortescue Metals Group (ASX:FMG) subsidiary FMG Magnetite Pty Ltd and Formosa Steel IB Pty Ltd
   

• Veris - $1.2m contract over 5 months with APA.ASX to provide surveying and associated services for the new Northern Goldfields Interconnect (NGI) pipeline in Western Australia.
   

• Veris - $1.2m Defence Sector contract across projects in Victoria, New South Wales and Western Australia.

• The AGM commentary was very positive and highlights the real potential of the scaled-down business as infrastructure work starts to build in 2021. It is clear the business is transitioning back to profitability.

• The end markets the group serves are approx mining 35%, property 35%, defence 5% and infrastructure 25%. All have potential tailwinds over the near and medium term. 
   
• At the AGM the comment was made that revenue is annualising at around $100m with margins currently at 10% with still an underperforming operation in NSW. A key metric is the utilisation rate which is running at around 65% with hopes to get to 75% for the 2022 year. Using their targeted group margins of at least ~15%, which on the current order book could see the company make at least $10m EBITDA this year rising to $15m in 2022.
   
• The balance sheet is in reasonable shape with around $5m of net debt which is being repaid quickly (down from $18m).
   
• An EBITDA multiple of 4x 2022’s earnings values the business at $60m versus the current market cap of $30m. So, we feel there is plenty of scope for shares to perform if management can deliver.
   
• The shutdown in Victoria has also had an impact on this year’s earnings is unlikely to be repeated in 2021.
   
• Alongside the Veris Australia business is a smaller technology business Aqura Technology. This business is profitable and growing with some recent contract wins and reasonable margins. Revenue is around $20m with margins at around 5%.

Summary

Following periods of underperformance, due to poor execution, poor management or structural issues, companies rightly need to prove themselves again. So the share price gains are often incremental as management can show things are back on track. We see VRS as one of those situations. We like that they are large, operate across many states, and have the scale to compete and win the larger contracts. And with better financial management, the margins can continue to improve at the same time. With the balance sheet back in order, this reduces an element of risk.

The "Bull and Bear" and "Desk Notes" are short commentary pieces by the author and not research or necessarily the views of Wentworth Securities or Wentworth's other advisors and Directors. 

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