Great industry tail-winds, dominant position in a niche

This company is growing by acquisition in an area it understands well

Jun 10, 2025

As usual the below is not investment advice - do your own research. If you want the workings of how I got to some of the numbers below, DM me. Thanks for reading!

Water Intelligence Plc (WATR.L, $WATR)

Non-invasive leak detection business primarily in the US but with UK and Ireland presence. American Leak detection (ALD) is their main source of income (85%). It’s been operating for 50 years and many of the franchisees have been with the business for decades – some are selling back to WATR. WATR is also selling new franchises in underserved territories.

Thesis

The management almost signalling “go away, don’t look too much”. This could be bad. Given the management are long-term holders I think it might be the opposite. The main reasons:

Great niche service (ALD) with significant tail-winds and high market share which has been going on for over 50 years.
Buying up local (and international) plumbing businesses with the view of using these to expand ALD technology presence. Recently they bought an Irish plumbing business Feakle Gas and Plumbing (FG&P) ~ 5 PE spread over 4 years so minimal outright cash outlay. Weirdly, the company they bought doesn’t even have a website (not one I could find) and was setup just 8 years ago (newspaper article). They have sales of EUR 3.7mil and operating profit of EUR 500k. After a quick Google it seems that there is a real shortage of plumbers in Ireland so a lack of website may not be such a big problem. I spent EUR 2.50 for FG&P annual report (they don’t give these for free in Ireland) for 2023 (none available for 2024 yet) I think it’s pretty impressive that they can make this sort of money without a website – they must be well known locally. They had 28 employees, EUR 1.3m in cash on the balance sheet…
The above purchases are structured so that very little cash is paid upfront – perhaps one time PBT and then they give the seller back the profits they would have made plus a little extra for several years – to some extent I wonder why the seller does it but hey. These are pretty cheap purchases and they only started doing these a few years back – so the full impact of the additional revenue should start hitting the bottom line about now… The overall spend on these acquisitions since 2021 was some $58m and the net income they generated at the point of purchase was around $10m so not an outrageous multiple of ~6. Not all of that has hit the bottom line yet.
Large chunks (~40%) owned by the CEO ~ both directly and through his investment vehicle. Some see this as somewhat murky as he’s free to do mostly as he pleases but I see it as good alignment of interest mostly
Very attractive gross margin % – high 80s. Less attractive ops margin % ~ 10%.
Attractive revenue and profit growth largely driven by acquisitions – if these are just the franchises and plumbers that should be OK.
Move into insurance-financed prevention in collaboration with
https://streamlabswater.com/. Insurance companies are moving in that direction so they started offering what’s required ie prevention solutions. Now they are one stop shop – prevent, detect, fix.
New CEO of ALD is a true expert of the field having grown up as part of the family franchise (started by his father) in Dallas – a franchise that WATR has recently bought back (arguably at larger multiple than the rest). ALD now moved HQ to Texas.
OTC listing in the US should be imminent for better US investor access.

Questions/Cons:

Buying up their own franchises – why if that increases required working capital and leaves big chunks of goodwill. One explanation is better control over the corporate branches, another explanation could be that the franchisees have been in the business and want to retire anyway or may not have the working capital required to expand. On the positive side they don’t seem be going overboard with the prices (avg 4-6 P/E) and if in trouble could probably sell them again to new franchisees.
As a result of the large goodwill and intangibles there is almost no tangible equity – maybe ~$2m on market cap of £65m!
They are typically quite late in publishing results (not after deadline but just before)
Somewhat strange relationship with SEEEN (SEEN.L) (WATR and De Souza are both shareholders). De Souza is also chairman of SEEEN… They use SEEEN for extracting video information for jobs and for training https://waterintelligence.co.uk/video-based-ai-training/ but tbh don’t see a major benefit so why they also own part of the business is not so clear. They spent about $1m on the shares which are now worth maybe a quarter of that so not a great decision so far.
They issue equity from time to time – they haven’t recently but used to quite a bit:
Key man dependency and issue of partly paid shares as well as options

Valuation

Given that some of the net income is not yet visible in the numbers – I think they could make around $12m EBIT which would make them a $150m (£110m) company so upside of about 60% upside from here on.

Conclusion

I don’t think this will be a huge holding for me or one I’d want to convince anyone to buy heavily. On balance I think it’s an OK idea – with good upside tempered with a number of questions which could turn it sour. I think I’ve spent too much time on it but it was interesting to learn about it.