Veris listed on the ASX in 2011 through a merger with Emerson Stewart Group. The merged group was known as OTOC but was renamed Veris in 2016. The business has been transformed from an Infrastructure business delivering services to the mining and government sectors to Australia’s leading surveying and 3D spatial business, now the core of the expanded Veris group. The transition of group revenue from a WA based mining boom to Australia’s largest ever infrastructure boom and the property sector was primarily due to the acquisition of eight surveying 3D spatial businesses and Elton Consulting, which added consulting and advisory services and extended its reach to 20 locations Australia wide. However profitability has slumped since 2016 due to indigestion arising from integration of these businesses. Early in July, a major restructuring program was announced designed to eliminate some $3 million from the cost structure and to restore profitability.

The vison has been to maximise its exposure to the project development lifecycle realising value from the initial concept through construction and ongoing maintenance. Its skill sets and capabilities have traditionally been critical in planning and construction but technology has enable the development of considerable data and analytics capabilities which will support long term asset management, as well.

Surveying and 3D spatial mapping are critical tools in virtually all building and construction and are essential in identifying and setting property boundaries and the location of specific structures. They are also essential tools in route planning and building roads and railways. Accordingly, with Australia continuing to experience high rates of population growth, demand for these services will remain strong for the next few years at least.

Strong population growth, especially in Melbourne and Sydney has been and will continue to drive major land sub-divisions on the urban fringe whilst governments are starting to invest heavily in urban planning and infrastructure. Major road and railway projects are underway in most capitals, many of which are underground which requiring specialist skills in 3D capabilities, where competition is much less compared with basic surveying, which is now commoditised. Further, with multi-year development spans, work levels are expected to remain elevated, potentially for the next five years.

With vast amounts of spatial data now captured and with greater analytical capabilities, Veris is very well placed to provide long term support services for large scale assets. In particular, when combined with visual (potentially drone) and sensor based monitoring, these services will support maintenance planning and underpin long term asset performance.

Although Aqura Technologies is a legacy business that does not easily sit with the company’s overall vision, it is pursuing growth opportunities which are being supported with a view to ultimately realising much higher value. Remote area communication is a global problem for exploration and resource development companies. In response to a particular client request, it has developed an autonomous mobile communications network supported by an on-board computer system and Satellite Communications on a transportable, rapid deployable platform (a trailer). It provides real time access to production drill data, consistency in data acquisition from sensors and field devices, whilst enabling field workers to access business applications. This could be developed into a standardised platform with global sales potential for multiple remote area applications.

After a strong result in FY 2018 with EBITDA more than doubling to $11.2 million, the results went backwards in the six months ended 31 December 2018 and the restructuring announced in early July suggests that the FY 2019 result will also be significantly lower than the prior year.

The FY 2018 result was boosted by the acquisition of Elton Consulting, now the consulting and advisory business, with strong growth from the surveying, 3D spatial business. Whilst Elton has continued to perform well in FY 2019 and Aqura Technologies has enjoyed both strong revenue growth and margin gains, the EBITDA contribution from the surveying business, the largest business unit, slumped by over 50% in the interim period, despite revenue increasing by 15%. There has been considerable margin squeeze which would appear to be due to too much low margin, commodity type work and some structural inefficiencies, both of which the restructuring is seeking to markedly reduce.

Despite the earnings issues, the overall financial position appears to be strong. A significant operating cash flow surplus was generated in the interim period, compared within a small deficit previously and debt was cut back from its level at 30 June 2018. Despite a large write-down in the value of intangibles, and the effect of halving the value of shareholder equity, the net debt to equity ratio was a still comfortable 50% as at 31 December 2018. Intangibles still represent about 25% of total assets, with receivables being the largest asset at 34% of total assets.

Veris’ share price has been crunched since August last year, falling from around 24 cents to its current level between 5 cents and 6 cents. This clearly reflects concerns about the company’s earnings outlook and probably uncertainty as to whether it will continue to pay a dividend with the FY 2019 results. Having said that, Veris, through consolidating the highly fragmented surveying industry, has established itself as the leading integrated, multi-disciplinary provider of services to support urban planning, property and infrastructure development and construction.

The immediate challenge is to restore margins, but the broader challenge is to fully capture the value in having the deep, integrated offering that it has built. Emerging opportunities in asset management create further potential for value capture.

FY 2019 will probably be a year that the company would prefer to forget and for investors the share price is now heavily discounted. Certainly, there is downside risk if profitability is not restored, or at least heading in the right track in FY 2019. But if it succeeds quickly with the restructuring program there is considerable potential upside. If the dividend is maintained this year at 0.5 cents per share, the prospective yield is 10%.

Follow me and get all my research at www.facebook.com/gordoncapital/