Let us enjoy fly soon!!, page-52

Just heading out but thought I would talk about multiples - multiples is essentially the “risk” factor. There are global risks, industry risks and specific company risks that make up that risk multiple.
The lower the risk or perceived risk the higher the multiple. The higher the risk or perceived risk the lower the multiple.

With construction they bill their time (Labour hire business). Mainly it’s to do with large project based revenue (lumpy), hard to leverage, industry cycles, low barriers to entry, low margins, many firms and compete mainly on price.
This was RWL Water at the very start - they just had the skills and effectively was an engineering firm like everyone else. This is why Ron started acquiring the technology that we have today. He knew those who control the IP will effectively win. It also reduces the risk in the business as they now have products that can be leveraged and IP - thus increasing the multiple. He wasn’t looking at building a large engineering firm he wanted to provide the solutions. Also much harder to grow an engineering firm to a multi billion dollar company than a tech company. If he is building a legacy business do you think he would be satisfied with getting to $1bn market cap or think he is looking for $10bn market cap?


Now technology firms. They have the IP and products which straight away creates a MOAT or a defendable position in the market. You are price searchers, you have limited competition, can be leveraged, higher margins, higher barriers to entry and you don’t have to compete on price as there are limited alternatives. This is where MABR sat and thus commanded a higher multiple - if the product really is a game changer we have two competitors and by all accounts are not as advanced in commercialising it and do not have standford reviewing it. I like that we have competition- they will help spread the word about how disruptive MABR is, the market is large enough for us to share. Also market loves reoccurring revenues (whatever they can see as guaranteed revenue next year automatically reduces the risk) and when we start building that our multiple will grow (revenue growing and not huge concentrations of revenue = lower risk = higher multiple)

Now the combined group - the majority of the revenue has typically been from engineering style revenues however their tech arm is growing (desal growing year on year). The more they sell the tech the better for us regarding the multiple. I think currently the multiple is about right however the market hasn’t factored in the blue sky coming and thus the rerate could be large. I have seen water companies valued from 1-15 times revenue and it just comes down to the risk.

Which business would you want to buy?
Would you pay more for that business compared to the other business? Why? (Ultimately if profits the same then it’s the risk)

Currently at 2.5 x revenue, what happens next year if we start getting some good reoccurring revenue and desal and MABR side of the business continues to grows strongly? As you said revenue next year could hit US$160m what happens if our multiple goes to 3 or 4 or 5?

I am looking forward to finding out.