This is my first attempt at doing a more detailed review of a company I hold in RL and SM. 

I have to admit that I bought initially as a bit of a story stock having read/listened to a number of opinion pieces and interviews with the CEO on the growth prospects, IP and considering the increased importance of clean water and ESG stock considerations.

I made a significant purchase in the last CR (@ 28cps) and have watched the SP drift lower despite what appeared to be solid growth and announcements. I am writing this to try and clarify my position to hold or sell.

Please feel free to comment, critique, give feedback.

11% of RL portfolio, 3rd largest holding (currently -24%), 3.7% of SM.

There is not much broker information on any of the equivalent water stocks

Other ASX water stocks

There has been significant dilution during the last 12 months through the CR

Although Perennial hold 14% it is not listed in their top 5 holdings in their microcap fund.

The Pros

Experienced and well regarded CEO

Since the beginning of CY 2020, the group’s accumulated quarterly cash receipts have grown by approx. 29% over the pcp

The organic growth over a 2-year period is approx. 23%,

Cash receipts from recurring revenue as a % of total: 2018 38% 2019 54% 2020 58% 2021 70%

Strong acquisitions: • Capic, Perth/Western Australia, which already tracks approx. 70% above its historic 3-year average revenue

• Geutec Industrie- und Abwassertechnik GmbH, Germany. Geutec recorded approx. $0.9m in revenues (unaudited) in the December Quarter 2021, which is annualized approx. 100% above the $1.8m in annual revenues prior to the acquisition 

• Pumptech Tasmania Pty Ltd, Launceston/Tasmania Pumptech recorded approx. $1.0m in revenues (unaudited) in the December Quarter 2021, which is annualized approx. 60% above the $2.5m in annual revenues prior to the acquisition 

Hard to value the IP (I need to do some more research here)

World Leading Membrane Technology Provides Strong Competitive Advantage De.mem has a unique competitive advantage of proprietary and/or patented technology, underpinning the Company’s unique portfolio of hollow fibre Microfiltration, Ultrafiltration and Nanofiltration membranes. De.mem commercializes its membranes as the key component of its integrated water and waste water treatment systems or its Build, Own, Operate and service contracts, and in combination with the Company’s wide range of specialty chemicals, pumps and consumables that are typically required by clients during operations of membrane based water treatment plants. 

“next-gen” membrane technology, based on Graphene Oxide (“GO”) enhanced polymer membranes, with substantially improved membrane characteristics such as 20-40% higher water flux (throughput), leading to significantly reduced operating cost for the water treatment process.

De.mem’s  existing  technology  portfolio  comprises  three  wholly‐owned,  royalty‐free  product  families  (categories),  complemented  by  additional  IP  exclusively  licenced  from  world‐leading  research  institute,  Nanyang Technological University, Singapore  (“NTU”). NTU was  ranked no.  2 globally in membrane  research  technology by Lux Research (2013). De.mem’s wholly‐owned product families / categories are:    De.mem’s  hollow  fibre  nanofiltration  membrane,  which,  based  on  its  minimized  pore  size  in  the  nanometer  range,  produces  high  quality  treated  water  in  a  simple,  low‐pressure  and  low‐energy  consumption process;   De.mem’s ultrafiltration membrane,  an established water treatment process deployed for potable water  generation to industrial waste water treatment applications as well as for Reverse Osmosis (i.e. seawater  desalination) pretreatment;   De.mem’s new GO‐enhanced membrane.  

The Cons

Capital intensive for decentralised installations. 67% of revenue for product manufacturing and operating costs.

20% growth in revenue probably still not quite profitable so probably CY2024.

Small market cap so not much institutional interest.

CEO has 1.45% ownership otherwise not much “skin in the game”

Attempt at very basic valuation: revenue for 2025 assuming a 20% growth and 20% growth in manufacturing costs + 5% growth in staff/admin costs = $41M and FCF of $2.25M

Assuming a valuation of 2.5x sales = MC 102M. Shares 221M assume a 10% dilution = 323M in 2025 =32cps

18.5cps(2021) @15% growth/year = 32cps