In the art of water pump mastery, how does a specialist manage to deliver a second consecutive year of positive operating cash flow?

The metals and mining industry is the most significant sector on the ASX, comprising more than 650 companies engaged in exploring, developing, and producing various commodities like gold, iron ore, copper, nickel, lithium, and more. But instead of talking about which company hit the motherlode, let’s turn our attention to a company which might have something that all those 650 companies (well, at least the majority of) need to succeed: water pumps. 

A resources services provider specialising in pumping and dewatering solutions, Babylon Pump & Power (ASX: BPP) achieved a successful outcome in the June quarter, reporting a positive operating cash flow of $0.5 million along with $10.5 million in customer receipts. As for the entire FY23 period, the company’s operating cash flow remained positive at $2.3m, while customer receipts reached $34.9m. 

Positive operating cash flow has been driven by improved earnings across both rental and maintenance business segments. Additionally, Babylon is anticipating repayments of $5.9m from its blue-chip client base and remains with $3.4m of cash and undrawn debt facilities at the end of June to support growth initiatives. Babylon has now recorded positive operating cash flow in five of the last six reporting periods.

Commenting on the results, Managing Director Michael Shelby said: “This financial year has been significant in the Company’s growth and maturity. Strategic initiatives to grow our specialty rental business, restructure our maintenance business and focus on improving margins are delivering results.”

Aside from achieving significant improvement in operational cash flow and continued EBITDA growth whilst integrating two acquisitions, Babylon’s operations has transitioned into a new facility, and the Company is working on streamlining its maintenance activities.

Babylon’s business divisions comprise Specialty Rental (pumping equipment and power generation rental), Water Management, and Maintenance Services. In particular, its Specialty Rental division has seen improvements in asset utilisation and returns. Recent acquisitions, the latest one being rental pumps and specialist mechanical services RBH Engineering in February 2023, have contributed to earnings growth, with consistent test pumping activity and new projects lined up for FY24. 

The Company is expanding its rental fleet with hybrid power systems to reduce emissions for clients and cater to the broader needs of the resources sector. Industrial services fleet utilisation has also increased, and activity levels are expected to remain high in the new financial year.

Meanwhile, Babylon’s Maintenance Services division also observed positive changes in the past year. By simplifying and consolidating the maintenance segment into a single facility in Perth in late FY23, the Company managed to reduce overheads, improve margins, and run effective operations in Western Australia. 

In addition, the Company also claimed that its Queensland maintenance operations located in Mackay, run by its subsidiary Primepower Queensland, have delivered record earnings and standout performance thanks to consistent flow of work and a rightsized workforce. Babylon acquired Primepower in September 2019 to ensure that the Company has a presence in Australia’s two largest resources states, in which Primepower has significantly invested in its service-exchange engines and is now offering the same ready-to-go speciality engines for Babylon clients.

One question remains, how could Babylon succeeded by providing water pump rental services to mining and exploration companies? In Australian mining, water pumps are essential because mining operations often encounter water underground or in pits which are troublesome to the mineral extraction process. These pumps help to remove excess water from the mining areas to keep the mines dry and safe for workers and equipment. Without water pumps, mining operations could face flooding, which can be dangerous and disrupt mining activities.

Mining pumps also play an increasingly critical role in the containment and disposal of liquid mine waste to avoid the contamination of local water sources.

Could Babylon’s triumph be attributed to a massive clientele (with over 650 companies as potential customers!), soaring demand (no mining companies would rather see their mines flood), resources and expertise (after four acquisitions since its inception in 2017)— or a holy grail combination of all that set the stage for its rise among fellow ASX industrial stocks?