Babylon Pump & Power Ltd (ASX: BPP) co-founder and managing director Michael Shelby admits that the mining services provider has had a few setbacks over the last couple of years, but it is beginning to bear the fruits of management’s recapitalisation and refocusing effort.
“We have a more positive story this time and we are seeing the business turn a corner across all business units,” Shelby says.
The Perth-based Babylon operates two distinct divisions: rental equipment for water management and maintenance facilities for heavy diesel equipment.
While management is focused on the former division, the maintenance arm also has received its fair share of remedial attention.
The new strategy – overseen by incoming non-executive chairman Jamie Cullen – is clearly working. Babylon posted earnings before interest tax depreciation and amortisation (EBITDA) of $676,263 for the December 2022 half, a welcome turnaround on the previous $400,805 deficit.
Revenue was stable at $13.7 million, while the reported loss narrowed to $1.29 million from a $2.38 million loss previously.
The results show the specialty equipment rental side was the key revenue driver, with turnover surging 59 per cent to $4.1 million.
This number validates Babylon’s refocus on this segment, Shelby says.
The maintenance arm’s revenue declined 14 per cent to $9.5 million. But crucially the segment returned to profitability, posting $694,000 of operating EBITDA compared with a $288,000 loss last time around.
“It is pleasing to see the strategy transition translate into meaningful results,” Shelby says. “It was just about doing the basics, such as identifying the fat and rationalising our field services capability, which has been redeployed.”
The earnings rebound comes as Babylon beds down the second of two bolt-on acquisitions to deepen its presence in the WA mining sector.
Funded by a mix of deferred cash and shares, Babylon last August bought the private Resource Water Group (RWG), which provides bore field test equipment and other water management services.
The company doubled down in December, signing off on the purchase of the Boddington-based rental pump provider RBH Engineering Ltd (RBH).
Both deals were worth around $3 million and were struck on an EBITDA multiple of around three times – and were earnings accretive from day one.
The RBH acquisition entailed an up-front payment of $1.8 million, with the remaining $1.2 million deferred over 12 months at an interest rate of 8.5 per cent.
Shelby says a key benefit of both acquisitions is they can be absorbed into Babylon’s existing operations without additional overheads, with profits flowing through to the bottom line.
From a standing start in 2017, Babylon has always been acquisitive. In July 2019 the company purchased the Mackay-based diesel specialist Primepower Queensland for $4.2 million in cash and scrip; and in February 2021 the company bought water blasting and industrial services outfit Ausblast for $4.4 million upfront.
Despite the earnings turnaround, Shelby says the maintenance division still is considered non-core and the company is exploring options to monetise this segment.
“But now it’s worth more if we sell it off so it is a better position to be in,” he says.
On the flipside, Babylon is eyeing some more bolt-on water acquisitions, in a climate in which many proprietors are getting long in the tooth.
“The resources boom meant a wave of people who have made good money over decades, but are of a certain vintage and tired of running day-to-day operations,” Shelby says.
“Typically, they are family affairs with $10 million-a-year revenue or below, but the kids aren’t interested in taking over.”
He adds that Babylon is appealing as an acquirer, because the vendors can take care of their valued employees and clients.
“The vendors are buying into Babylon’s ‘big picture’ vision, enabling us to deals including a meaningful scrip component.”
Meanwhile, Shelby describes trading conditions as “exceptionally busy” with heightened visibility on where the next dollar of revenue is likely to come from.
“In past years the sales cycle was short and you didn’t really know what would happen three months out,” he says. “Having this great visibility allows us to plan, enhance profitability and deliver better results for our clients.”
A trait of the water rental business is that work is renewed month by month, rather than secured by long-term contracts. But by and large, the large clients don’t move in a hurry.
“They don’t suddenly decide they don’t need to pump water,” he say. “When you have a piece of gear on a pontoon weighing 16 tonnes, it’s not like they will return it tomorrow.”
Furthering the efficiency drive, Babylon in January moved in to new purpose-built premises in the Perth suburb of High Wycombe, consolidating several Perth leases.
“Apart from operational efficiencies, the move is also enabling us to attract and maintain labour in a tight market,” Shelby says.
Meanwhile, Babylon remains in a tight financial position with cash of $2.12 million and $2.099 million of unused financing facilities. But Shelby notes the company settled $4.5 million of outstanding convertible notes last July, thus removing a sizeable interest rate burden.
The company has receivables of $5.2 million from its blue-chip client base, which includes Rio Tinto, BHP, Fortescue Mining and Alcoa and Newmont.
“The acquisitions are earnings positive and the banks continue to be supportive with asset financing,” Shelby says.
Despite Babylon’s progress, the share price has yet to gain the traction its earning trajectory would suggest, and the company bears a modest market capitalisation of $13.5 million.
The biggest holder, former Elders executive Geoff Lord, retains the faith with a 25 per cent holding which was increased in the recent recapitalisation.
“I turn up every day to do my job, which is to improve the earnings profile, de-risk the company and improve the balance sheet,” Shelby says.
He adds that the owners of both RWG and RBH showed faith in Babylon’s near-term prospects by agreeing to deferred payments.
Whatever growth avenues the company chooses, they will be navigated carefully.
“We are not all guns blazing for unsustainable growth,” Shelby says. “We have taken a breath and are carefully building a sustainable earnings profile through organic growth and earnings accretive acquisitions.”
