DUG Technology’s Multiple Growth Levers

Small Caps | May 09 2025

Third quarter results for DUG Technology impressed and brokers remain upbeat given a full order book and building international momentum.

-DUG Technology's third quarter earnings margins rise
-Higher Software growth, costs ease in HPCaaS
-Prospects for DUG Cool and DUG Nomad
-A share price nadir, suggests Shaw and Partners

By Mark Woodruff 

Positioned for renewed growth, DUG Technology ((DUG)), provider of data processing and imaging services primarily to the Oil & Gas sector, reported a strong March quarter following a positive start to the year in January.

The company has since secured additional contract wins. Its international expansion remains on track, with multiple tenders underway across key regions.

According to broker Wilsons, the company is at an inflection point, investing strategically to support future growth and laying the groundwork for an anticipated acceleration in the pace of service contract awards.

Assisting this momentum, DUG displayed better-than-expected Software growth for the quarter, while modest cost reductions in its High-Performance Computing as a Service (HPCaaS) business unit saw earnings (EBITDA) margins back above 30% for the quarter, compared to the 28% anticipated by Ord Minnett.

This HPCaaS business provides cloud-based, high-performance computing solutions tailored for industries requiring massive data processing, such as geophysics, resources, scientific research, and engineering.

Demonstrating global reach, DUG designs, builds, owns, and runs some of the most powerful and greenest supercomputers on earth, claims the company's website, in Perth, Houston, London, Kuala Lumpur and Abu Dhabi.

In a single package, clients are offered compute, storage, software, and professional services, accessible via the cloud or through DUG Technology's customer-focused DUG McCloud platform, which was launched in 2019.

There are four business divisions: Geo-Software, Geo-Services, HPCaaS, and DUG Nomad. While the Services segment has historically been the largest, the HPCaaS division's share of total revenue is increasing rapidly.

When initiating coverage last year, Shaw and Partners highlighted DUG's Multi-Parameter Full Waveform Immersion imaging (MP-FWI) enables Oil & Gas clients to re-process existing seismic datasets with greater accuracy.

This feature could expand data processing's share of seismic study budgets from around 5%, with data acquisition then accounting for 95%, as clients shift spending toward re-analysis, explained the broker.

New Services project awards totalled US$22.7m in the March quarter, the company's best quarter since the first quarter of FY24, including $13.4m in January, a step-up from around $10m in each of the first two quarter of FY25.

This builds on the company's eight Elastic MP-FWI pilots and demonstrates to Shaw and Partners the technology is resonating with clients.

Elsewhere, Software was a key revenue contributor, rising by 23% year-on-year.

Underlying earnings (EBITDA) of $5.3m were up by $2.7m on the prior quarter, while earnings margins improved to 32.1% from 17.6%.

The analysts also noted offshore wind developments present a structural growth driver, given their requirement for subsea data analysis.

DUG's patented DUG Cool immersion, cooling technology, used in some of the world's largest and most sustainable data centres, cuts power use by up to -51% and reduces synthetic refrigerant use by -85% compared to conventional systems.

Beyond lowering operating costs, these benefits help clients meet ESG and carbon-reduction goals.

Providing the foundation of DUG's mobile edge-computing solution, DUG Cool sold globally under an exclusive licence.

Order book and costs

The order book rose by 30% quarter-on-quarter to US$42.7m as of March 31. Canaccord Genuity sees this momentum supporting stronger outcomes in the current fourth quarter and beyond.

The broker views the lift in the order book as evidence management is securing more work than it is delivering, with underlying upsell also contributing to the growth.

Highlighting operating leverage, Shaw and Partners notes costs were flat at -$11.2m quarter-on-quarter, despite ongoing international expansion.

The suggestion made is the share price has likely bottomed, while citing building order book momentum and multiple near-term catalysts, including DUG Cool and DUG Nomad, which are not yet reflected in the broker's forecasts.

Since DUG's FY24 results last August, the share price has declined from over $3.20 to $1.17.

Upcoming catalysts

Wilsons highlights potential for larger, longer-term contracts from Oil & Gas clients, noting DUG has now earned the 'right' to secure higher-quality awards.

The broker expects increased compute orders, a leading indicator of future contract wins, as well as additional Elastic MP-FWI pilots converting to full contracts.

Momentum is also anticipated in the Middle East, supported by the recent opening of the Abu Dhabi office.

Canaccord Genuity is watching for the first sales of DUG Nomad, though cautions commercialisation of both DUG Nomad and DUG Cool remains promising but just out of reach.

Management is progressing DUG Cool through its exclusive worldwide licensing deal with Baltimore Aircoil Company (BAC), which Canaccord understands is actively marketing the technology to hyperscalers and other customer segments.

Similarly, DUG Nomad, a rugged, modular mobile data centre designed for HPC and AI workloads at the edge, is advancing toward commercialisation, with management citing growing interest.

Valuation

Wilsons considers the current premium valuation for DUG Technology is justified given a higher growth rate relative to peers with a three-year EBITDA compound annual growth rate (CAGR) of 24% compared to the 4.2% industry median.

This broker's target multiple for FY26 EV/EBITDA of 6 times is 33% higher than the median of its global seismic processing peers which is sitting at 4.5 times.