Access to safe, clean water is one of the greatest challenges facing the world's new economic powerhouses. In India, China and Latin America, improvements in water sanitation haven’t always tracked GDP growth, leaving a strong demand for ways of providing households with affordable, clean water. London-listed, Woodford-backed chemicals group HaloSource (HALO) may be a small company, but it is well-placed to help tackle this monumental global challenge thanks to its proprietary water treatment technology. The company's great commercial prospects, underpinned by recent agreements with major global distributors, mean the shares hold significant potential.
- Leading intellectual property
- Regulatory approval
- Major commercial partnerships
- Impressive shareholder backing
- Still lossmaking
- Lumpy orders and reliance on partners
HaloSource's drinking water technology works using small cartridges full of bromine-coated polystyrene beads, which are 60 times better at killing bacteria than chlorine and don't come with the unpleasant odour or taste. These cartridges, which last around six months and cost around $7.50 (£4.85) each, are designed to fit into the water purification devices sold by Unilever, Panasonic and other major consumer goods companies for as little as $50 per device. That works out cheaper - and faster - than boiling water. A contract with Chinese industry leader Perfect Water helped to drive revenues in the drinking water division by 61 per cent in the 12 months to June, while a deal to supply cartridges to Panasonic's newly launched range of devices in India should boost 2015 sales figures.
This strategy leaves HaloSource somewhat reliant on the marketing efforts of its commercial partners, but the cartridges offer an excellent source of repeat revenue. Based solely on existing contracts, analysts at Liberum expect revenues from purification cartridges to hit $24m a year by 2017 from $6.3m in 2014. The broker also expects a $10m fundraising last year to see the company through to the point it is generating cash profits.
And while the drinking water division is the key engine of growth, HaloSource has other strong technologies in its arsenal, including cleaning products for industrial waste and storm water. The most important of these is its high-margin recreational water division, which sells cleaning products to owners of pools, spas and water parks in the US and currently accounts for around half of revenues. A restructured marketing team should boost sales this year.
HaloSource also boasts a top-tier group of shareholders including JO Hambro Capital, Invesco and star fund manager Neil Woodford, who owns a 21.5 per cent stake. As we recently pointed out in our investment case for fellow Aim chemicals firm Revolymer (REVO), this is an excellent independent validation of the technology and strategy. Regulatory approval for HaloSource’s drinking water chemistry in the US, India, Brazil and China should provide additional confidence.
HaloSource (HALO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 20p | MARKET VALUE: | £44m | |
| TOUCH: | 19.5-20.5p | 12-MONTH HIGH: | 25p | LOW: 11p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | na | |
| NET ASSET VALUE: | 10¢ | NET CASH: | $9.8m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 13.3 | -12.4 | -13.5 | nil |
| 2013 | 16.1 | -12.4 | -8.0 | nil |
| 2014 | 21.0 | -8.6 | -5.3 | nil |
| 2015* | 27.1 | -4.9 | -2.2 | nil |
| 2016* | 35.2 | -1.5 | -0.7 | nil |
| % change | +30 | - | - | - |
Normal market size:10,000 Matched bargain trading Beta: 0.08 £1=$1.56 *Liberum forecasts | ||||
