Ondo Insurtech (LON: ONDO) shares are up 250% year-to-date, spurred by multiple encouraging developments in a classic FTSE small-cap growth story. As most readers will know, I tend to cover and invest in high-risk exploratory mining and biotechs — only making exceptions for those companies with a remarkably strong investment case.
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A company that Share Talk has highlighted from circular 7p days when you consider one of the company’s biggest shareholders is Gervaise Heddle former Chief Executive, Greatland Gold plc (GGP) we had to sit up and pay attention.
I also prefer to buy shares on the dip, and then hold for the long term. And Ondo is very much not on the dip — indeed, shares are changing hands for 22.7p, a record high and almost double its March 2022 IPO price of 12p.
At the time, Ondo had already built up a client base of insurance partners including Aviva, Hiscox, and Direct Line, signalling a product worth exploring. And the IPO was the first ‘Insurtech’ IPO to hit the London market — referring to the use of tech innovations designed to find cost savings and efficiency from the current insurance industry model.
The thing is this: Ondo’s LeakBot tech breakthrough may even now leave the shares undervalued. I contacted CEO Craig Foster with some queries over just how disruptive this technology might be. The full Q&A can be found at the end.
As always, please bear in mind that this is not financial advice.
LeakBot tech in brief
The LeakBot is Ondo’s flagship product — and long term success depends on it becoming an industry standard. Let’s start with a simple explanation of how it works. In the CEO’s own words:
‘There is a thermistor that measures the temperature of the water coming through the pipe. A second thermistor measures the ambient temperature in the air. The idea is when there is no water use for a period, the water stands still in the pipe and the two temperature readings settle at an equilibrium point. When there is water flow there is a delta between the two readings. The insight is that if there is a leak (it can be very small, and anywhere on a mains water system) there will be a permanent delta on that reading.’
The company owns 29 patents on the tech worldwide, including a patent on the crucial core temperature-based method, giving it ‘significant protection.’ Foster also assures me that due to the difficulty in developing the company’s algorithm, there are ‘pretty high barriers’ to being copied by a competitor — and the tech reduces water damage claims by a whopping 70%.
Of course, given the profit potential of new Insurtech in the water damage industry, Ondo hasn’t been the only company to try to develop a solution. But prior attempts have typically been accompanied by one of two problems — either they cost too much at circa $400-500 and require professional plumbing in, or they can’t be placed where ‘the majority of pipes are actually located.’
From a consumer perspective, Foster notes that a homeowner would ‘most likely’ receive a LeakBot free from their home insurer, with repairs completed free of charge. The insurer then pays Ondo to provide the LeakBot and repairs in exchange for a fee less than the insurance pay-outs saved, and water gets saved too.
This represents a rare win-win-win.
Share price movement
Ondo shares were changing hands for only 6.5p in mid-April but have more than trebled since. Foster cautiously considers this price movement a fundamental re-rate —the upwards catalyst of course was the signed ‘go-to-market channel partnership to accelerate LeakBot deployment in North America and worldwide’ with $3.8 billion WNS.
While the CEO won’t give me the details of any commercial terms (I tried), he’s clear to emphasise the development as a ‘great partnership, a significant milestone,’ and a ‘game-changer proposition within the home insurance industry which can considerably accelerate our business scaling.’
WNS is a market leader in BPM for insurance companies, with Ashi Bagdadi, Corporate SVP Insurance noting that it works ‘with carriers globally to handle millions of dollars of water damage claims every year so we understand this risk intimately, which puts us in a unique position to deploy LeakBot at scale and guarantee the return-on-investment for our insurance customers.’
Ondo is providing the technology and repair services, while WNS is managing claims, customer operations and transformation services, as well as offering a guaranteed indemnity saving.
The novel Loss Reduction Guarantee should see naturally risk-averse insurers ‘go big’ — with the guarantee working by comparing LeakBot installations to a control cohort and then comparing financial savings. As Foster notes, ‘insurers are incentivised to move straight to large scale rollouts to deliver a guaranteed improvement on their loss ratio.’
The companies consider that there is potential to deliver ‘material financial benefit’ to WNS’s global client base alone. However, water damage is estimated to be a $17 billion insurance problem with 1.6 million claims per year — there is considerable room for further growth.
Where next?
Ondo recently raised £815,000 from a ‘reactive’ placing after being approached by a TR1 shareholder, and this additional working capital will be used to ‘accelerate client deployments in different geographies.’ Placings are typically followed by share price falls, and the immediate aftermath is where I tend to invest, but apparently the stock is in high enough demand that the placing barely made a dent.
Today (6 June) Water Industry Spring Innovation Knowledge Showcase could be the next catalyst to send Ondo shares higher. Portsmouth Water is slated to share its LeakBot Pilot results alongside the Main Market company, and strong in-practice results could be hugely beneficial to shareholders. In essence, the pilot is to discover whether LeakBot can be used by a water company to reduce water demand through the prevention of plumbing-side leakage in homes.
For context, OFWAT wants household water consumption to fall below 35/litres per day and is introducing a £100 million fund to ‘help stimulate transformative, sustained and measurable reductions in water demand nationally using a range of water efficiency approaches.’
Water is a political hot topic at the moment — reports that water companies plan to charge customers £10 billion on their bills to improve the raw sewage situation while also paying out dividends has become a focal point of public anger, regardless of the actual facts. Leaks have also been a historical flashpoint, and a tech-focused solution delivered by the private sector may become big news.
Foster notes that while Ondo has until now been concentrating on ‘the problem for home insurance,’ there is an opportunity in household leaks in the UK water industry, with water companies ‘trying to figure out how to (reduce water usage) and importantly demonstrate to Ofwat that they can measure the saving.’
As a long-term investor, Ondo Insurtech is therefore looking attractive on multiple fronts.
Full Q&A with CEO Craig Foster
- Ondo shares were changing hands for 6.5p in mid-April but have now rocketed to 22p at time of writing. Is a minor correction due, or is this a fundamental re-rate?
Far be it for me to predict what the share price will do, but most sensible observers would assume a fundamental re-rate. The facts are we are creating a world leading technology company, we have a unique patented solution to a $17bn global problem, we have proven traction with blue chip insurance companies, and at 22p our market cap is still only £16.5m. We arrived on the market in March 22 at 12p as an unknown company right when the market took a negative turn so the few folks who found us at 6.5p are quite happy about it at the moment!
- LeakBot is your flagship patented tech, designed to reduce water damage claims costs by 70%. How was this ‘proven’ — can you explain how it works in simple terms?
It works using temperature. There is a thermistor that measures the temperature of the water coming through the pipe. A second thermistor measures the ambient temperature in the air. The idea is when there is no water use for a period, the water stands still in the pipe and the two temperature readings settle at an equilibrium point. When there is water flow there is a delta between the two readings. The insight is that if there is a leak (it can be very small, and anywhere on a mains water system) there will be a permanent delta on that reading. That is the only known way of detecting micro-leaks with a clip-on technology and we own 29 patents on this technology around the world.
- The catalyst came on 20 April, where Ondo announced it had signed a ‘go-to-market channel partnership to accelerate LeakBot deployment in North America and worldwide’ with $3.8 billion WNS. Did they approach you and can you reveal any of the commercial terms?
The commercial terms are confidential, and the deal was struck by our North American General Manager Jim Strickland. WNS work with insurers all over the world to manage various business processes for them, including household claims. In this deal WNS will guarantee the claims saving results for their insurance customers who deploy LeakBot as part of their BPO solution, so it is a great partnership for us.
- If WNS is prepared to offer a novel Loss Reduction Guarantee, is the plan to roll out slowly to see how the LeakBot works in practice? How will the guarantee work?
On the contrary the goal is to encourage insurers to go quickly. Insurers are naturally risk adverse and prefer to take small steps to prove the solution with their own data, whereas the guarantee is designed for insurers to go big as there is no risk to them. The guarantee works by comparing the “with LeakBot” cohort to a control cohort and measuring the financial benefit of the claims savings.
- The potential to bring ‘material financial benefit’ to WNS’s global client base, and presumably to many more as growth continues could be worth serious money. By some accounts, it’s estimated as $17 billion insurance problem with 1.6 million claims per year for water damage. Why is Ondo’s market cap still only at £16.75 million?
The market cap is a reflection of the fact that we came onto the market as a small company, 25 employees, with no profile with investors whatsoever, and limited financials in the public domain. I think it is also the reason why the “early adopter” investors are so excited by the business, as it is unusual in the UK to find a listed tech company at such an early stage, but with a real problem to solve, a real product, real revenue, real customers, real traction, and serious growth potential.
- If the LeakBot is proven to work at scale, could it become the global standard? I’m aware that the tech is patented, but what exactly is patented to stop others from copying your design?
The core temperature-based method is patented which gives us significant protection. In addition, there is a steep learning curve in how to really code and develop the algorithm to work effectively in all circumstances so there are pretty high barriers to anyone copying us.
- Say I’m a new customer. Are repairs chargeable, how long is the LeakBot guaranteed for, and how does this affect the company’s bottom line?
As a homeowner you are most likely to get LeakBot for free from your home insurer, and if we detect a leak the repairs will be free of charge too. In the background the Insurer is paying Ondo to provide this service due to the claims saving the insurer gets from catching these leaks early and stopping claims before they can happen. We roll all of this into a single turn-key service that the insurer pays for on an ongoing basis.
- Dozens of other companies have launched other solutions which have failed due to either costs or simply not working as described. For cost in particular, sell the LeakBot to me.
You typically see two other types of solutions, moisture sensors and in-line plumbed in systems. Moisture sensors will detect a leak in a particular accessible place, i.e., under a sink. The problem is you can’t put them where the majority of the pipes are actually located, in cavity walls, floors and ceilings. Insurers have tested these at scale without much success. The other more effective devices are the plumbed in solutions, but they are often $400-500 a unit and require a professional installation. LeakBot is comparably a low cost solution but has the same efficacy as a plumbed-in system so stands apart in terms of its ROI for an insurer and saving water is good for the environment too.
- Are you primarily targeting homeowners or insurers? Is getting insurers to offer the tech to homeowners on your behalf the better strategy, or is it the other way round?
We are a B2B company, helping insurers to mitigate claims.
- You raised £815,000 last month at a very decent placing price. How will you use the cash to scale up the business?
The placing was reactive in so far as we were approached with an offer by a TR1 shareholder who we believe has our best interests at heart. We are trying to run the business as tight as we can, but the additional working capital will be put to good use as we accelerate client deployments in different geographies as we continue to grow quickly.
- Are you looking forward to the Water Industry Spring Innovation Knowledge Showcase? I’m only speculating here, but do you think you might benefit from the to-be-announced £100 million OFWAT fund to help reduce water demand?
Our focus to date has really been on the problem for home insurance. However, there is a renewed focus on household leaks in the water industry in the UK, driven by the England and Wales regulator Ofwat. They want households to reduce consumption by 36 litres/day and water companies are trying to figure out how to do this and importantly demonstrated to Ofwat that they can measure the saving. Portsmouth Water were the first water company to try and re-purpose technology from a different sector to try and do this and on Tuesday we will reveal whether that was a good idea or not!
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This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
