BULL POINTS:
■ Global water shortage will drive demand
■ Technology allows less energy and chemical intensive desalination
■ Well funded
BEAR POINTS:
■ Near-term revenues likely to be lumpy and unpredictable
■ Possible acquisition risk
IC risk guide
Tip style: Speculative
Risk rating: High
Timescale: Long-term
Globally, water is in short supply, and demand for clean water is growing rapidly. According to water technologies specialist Modern Water, global water consumption has increased by 600 per cent since 1950 and demand will grow by another 50 per cent by 2050, while the availability of clean water is actually shrinking.
So Modern Water's desalination technology could help solve this problem, especially as it uses much less energy and fewer chemicals than conventional desalination processes. The company already has two plants running, in Gibraltar and Oman, where demand for fresh water is high. Indeed, spending on water and wastewater in the Middle East is forecast to rise from £19bn in 2009 to £32bn by 2016, according to Global Water Intelligence, a specialist publication.
The system developed by Modern Water uses what's called a manipulated forward osmosis process to convert seawater to drinking water. This draws water through a membrane rather than pushing it through in the traditional process. Its first proving plant in Gibraltar has been running since September 2008. Its second plant in Oman was commissioned in November and is halfway through a six-month trial for Oman's Ministry of Power and Water. Its technology is suitable for new plants, but also for retro-fitting to existing desalination plants.
Assuming the Omani plant is successful, the company has signed an agreement with Omzest, a conglomerate, to help market its technology in the country and throughout the Middle East. Management says that interest is strong. However, Modern Water is still at the early stages of its development, so future revenues are uncertain and could be lumpy if and when they materialise.
Happily, Modern Water has a healthy cash balance of £23m, which should help smooth out any shortfalls in its income. Chief executive Neil McDougall reckons the cash will be sufficient to see the company through to breakeven. Meanwhile, Modern Water might buy a desalination plant for retro-fitting with its technology. Such a move should bring revenues forward, but might be risky.
| ORD PRICE: | 75p | MARKET VALUE: | £44.2m | |
| TOUCH: | 72-75p | 12-MONTH HIGH: | 89p | LOW: 29p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 65p | NET CASH: | £23.1m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 0.0 | -2.43 | -3.7 | nil |
| 2009 | 0.1 | -3.66 | -6.0 | nil |
| % change | - | - | - | - |
Normal market size: 3,000 Market makers: 5 Beta: 0.1 | ||||
Modern Water has also adapted its osmotic technology to cooling towers used in heavy industry. This reduces their water consumption and chemical usage, potentially saving 90 per cent of the water costs of plants using desalinated water. The technology is scheduled to be fitted to an ethanol plant in Oman this summer. Analysts at investment bank Nomura Code speculate that the application to cooling towers could be Modern Water's quickest route to profits, such are the cost savings the technology offers.
Elsewhere, Modern Water has generated its first revenues from its Cymtox technology. This toxicity monitor uses bio-luminescent bacteria to signal whether drinking water contains dangerous levels of toxins. It is used continuously as an early warning system of toxic leaks into water supplies and to test effluent before its release. Such a real-time monitoring system has significant advantages over the traditional batch-testing method. In the second half of 2009, Modern Water made its first sales of Cymtox to China.
The company also has another technology, AguaCure, on trial with Southern Water and Severn Trent Water in the UK. AguaCure is a patented chemical-free treatment that removes contaminants from water.
