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De.mem Limited (ASX: DEM) - Water and Waste Treatment Solutions

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De.mem Limited (ASX:DEM or ‘the Company’) is a Singaporean-Australian business that
provides bespoke de-centralised water and waste water treatment solutions, combining its
unique water membrane technology product suite and specialist engineering skills. “De.
mem” is short for “decentralised membranes”, namely decentralised (ie. on customer
premises), modularised, membrane technology solutions. To date, its key vertical markets and
geography have been the mining, municipal, and industrial sectors largely in the Queensland
state market, through water treatment solutions that include potable water, sewage,
and desalination. Customers include global mining companies, large EPC contractors,
municipalities, water utilities and multinational corporations and have generally been blue chip
in nature.
IIR believes DEM is strongly positioned for growth based on its unique and proprietary
portfolio of membrane technologies, its specialist engineering skills and its growth strategy,
with the practical foundations of the latter now firmly in place. Its technology portfolio of
different membrane technologies combined with the Company’s engineering solutions
enables the Company to position itself as a ‘one-stop-shop’ water treatment solutions
provider in its target markets.
The Company’s growth strategy consists of five key pillars: 1) geographic diversification in
Australia and New Zealand; 2) industry diversification, with the food & beverage, agricultural
and consumable sectors being key target segments; 3) ongoing product expansion through
a combination of internal R&D and potentially further bolt-on acquisitions, providing a ‘onestop-
shop’ solution and cross-sell opportunities; 4) increasing focus on the provision of
water treatment solutions through Build, Own, Operate (BOO) leasing arrangements and
service contracts to increase the degree of recurring revenue and, as such, further de-risk
the Company’s revenue and earnings profile; and, 5) international expansion, with a focus on
select east Asian and European markets.
Over the last six months, the Company has progressed all five key pillars. While it will take
some time to capitalise on a number of more recent strategic achievements, IIR expects the
next 18 month period to be something of a watershed period for the Company, providing
concrete evidence through contractual wins on the degree and timeframe on which it can
deliver on its overall growth strategy. Its ability to deliver on its targeted vertical market and
geographic expansion strategies and the ability to grow recurring revenues through BOO
solutions will be particularly important indicators over 2020 of the potential longer term
earnings trajectory.
The Company is now on a clear and imminent path to a cash positive position, with cash
outflows in the most recent 3Q2019 period declining to a negligible $30K and highest
ever quarterly cash receipts from customers of $3.4m. The Company anticipates net
profit breakeven based on annual revenues in the $15-20m range. DEM appears likely to
commence FY20 (Jan 2020) with $9.5-$11.3m of annualised recurring revenues, with further
revenue from equipment sales (~$6.3m in FY18).
IIR has a high regard for the CEO, Andreas Kroell, the Board (which bring significant industry
expertise, contacts, and corporate advisory knowledge) and believe all the necessary parts
of the senior management are in place to successfully execute on the Company’s growth
strategy.
At 27cps and assuming FY19F revenues of $12.5 m based on $8.4m accumulated cash
receipts during the first three calendar quarters plus $4.1m projected for the 4th quarter,
extrapolating the growth trend during the year, DEM trades at a EV/revenue multiple of 3x,
a material ~75% discount to its ASX-listed water technology peers. IIR believes potential
catalysts for a re-rating include: 1) growing evidence to materially deliver on its vertical
market and geographic expansion for contract wins; 2) material growth in recurring revenues,
most importantly through BOO contracts, and thereby growing and de-risking earnings; and
3) increasing awareness and recognition by investors of the uniqueness of its technology
portfolio, which in turn place the Company in a position of competitive strength.
Based on the valuation analysis contained in this report, IIR has established a 12-month
share price target range for DEM of $0.45 - $0.50 per share.