Water treatment technology company De.mem had a record-breaking year in 2020. With a blue-chip client base and recent acquisition, the company is set for another solid year in 2021.
Investment in water sounds like a no-brainer. After all, water is the elixir of life, and having clean water is crucial not only to everyday life, but also to the industries that produce our everyday things. Water tech is also a crucial part of the new, trillion-dollar ESG economy.
One ASX water treatment tech stock that has been doing particularly well over the past year is De.mem (ASX:DEM). A curious name for sure – it’s short for Decentralised Membranes
It’s an Australian-Singaporean technology company focusing on decentralised water treatment using membrane technology. A decentralised system, unlike centralised, treats and discharges the water locally close to the point of origin, at a much lower energy cost.
Membrane technology
De.mem’s water treatment service revolves around its IP-protected membrane technology, which is essentially a process that filters and removes unwanted constituents from water. The membrane itself is a barrier that allows certain substances to pass through, while blocking other unwanted contaminants.
The membranes are straw-like fibre structures (see Image 1 below), which are hollow in the interior, with the exterior being micro-porous structures. There are tiny pores which allow water to pass through, but small enough to block contaminants, such as bacteria and viruses, that are bigger than the pores.
De.mem’s technology comprises membranes of different sizes, from nano-filtration, which blocks particles from the ionic to the molecular range (0.001 to 0.01 micrometre), to the bigger ultra-filtration range (0.01 to around 0.01 micrometre).
The nano-filtration membrane has a superior filtration performance due to minimum pore size at low pressure and energy consumption. It can block things like viruses and pesticides, and has obvious applications in the food and agricultural industry.
The ultra-filtration technology meanwhile, can block particles from bacteria to dyes, and has a large applicable market, such as pre-filtration for reverse osmosis and potable water treatment.
The straw-like membranes are usually put inside white tubes like in the diagram below, which contains around 10km of membrane fibres, making it a very compact system.
Speaking exclusively with Stockhead, De.mem founder and CEO Andreas Kroell – who has extensive experience in water treatment technology – says the company had developed the technology by partnering with Singapore’s Nanyang Technological University. (NTU), which is renowned for its membrane and water treatment research.
“Out of that collaboration with NIT, we brought a few membranes into De.mem, while developing our own membranes, which are manufactured in our facility in Singapore.”
“Chemical formulation allows us to make this hollow fibre membrane with pores which are so small that they are in the nanometer range. And that’s one of our unique technologies”, he added.
Diversified client base and revenue streams
De.mem works with a diversified client base, and some of the biggest blue chip companies in Australia, with the likes of Rio Tinto, AGL, and Coca Cola.
As noted, its technology can be used in various use-cases, and is applicable to different industries.
The food and beverage sector, for example, is a key one for De.mem, where it helps to process waste water and provides water recycling services.
But the biggest clients for De.mem are in the mining sector, where it provides potable water for mining camps, as well as supplying desalinated water for mining operations.
The company also has diversified revenue streams, which are broken down into two segments – projects and recurring.
On the project side, which made up 42 per cent of revenues in 2020, the company provides one-off equipment sales and water treatment systems as a turn-key solution to the customer.
But it’s the recurring segment that the company is focusing on. This segment has risen from 38 per cent to over 58 per cent in 2020.
“On the recurring side, we have a number of long term maintenance contracts, which involves us providing periodic services and maintaining the system. For the Build and Operate (BOO), we build and own the system, and lease it out to the customer,” Kroell said.
So how capital intensive is the business, and does it allow for growth?
According to Kroell, generally outside of the BOO model, the business does not require significant upfront working capital.
“The only component of the business that needs capital expenditure is the Build and Operate segment. For the project segment, we are typically paid in advance and in instalments over the life of the contract. That also applies to the the recurring revenue segments.”
Kroell expects that as the company matures to the point of breakeven, the BOO segment could in the future be financed by loans and debt. Currently, the company has zero long-term debt.
Capic acquisition
De.mem has demonstrated that it knows how to grow strategic acquisitions.
The company made a couple of strategic acquisitions over the last two years, in line with its objective to become a “one-stop shop” for decentralised water treatment.
It acquired Pumptech in 2019, and most recently, the Western-Australian based company called Capic for a consideration of around $4.4 million.
Capic is a supplier of specialty chemicals used in water treatment, and has a lucrative client base that includes ASX-listed BHP and Pilbara Minerals.
Kroell said the Capic acquisition was a perfect fit for De.mem, which will see it enter the lucrative WA market and add significantly to its revenue.
“The motivation behind the purchase is to build a one-stop-shop offering,” Kroell said. “There is a natural correlation between water treatment equipment, pumps, and chemicals. And Capic is especially strong in chemicals for water treatment.”
“Customers usually need all those in one go, and ideally they want to deal with just one supplier.”
Asked if investors could expect to see further acquisitions as a path to growth, Kroell said that organic growth and the cross-sell opportunity presented by Capic provide significant growth potential, but would not rule out “bolt-on” strategic acquisitions if they provided, for example, a stable, high quality base with cross-sell potential or an opportunity to expand De.mem’s “one stop shop” offering.
Kroell also noted that all acquisitions have typically been 5% or less of De.mem’s market capitalisation.
While the focus is still on being the number one water treatment company in Australia, he’s also keen to explore international opportunities in the next few years, especially in developing countries.
The company estimates that the total addressable market for decentralised water treatment is $21 billion globally, with Australia making up a $300 million slice.
“Our long term objective in Australia is to grow the market share from the current 15 to 20 per cent in Queensland, to 15 to 20 per cent nation-wide,” Kroell said.
Record growth
In its latest financials, the company reported solid numbers, delivering its inaugural positive cashflow of $544k for the December quarter.
It also delivered a record $16.5 million in cash receipts for CY20, 58 per cent of which came from recurring cash receipts.
The company expects an even stronger CY21, with a pipeline of $14 million cash receipts already visible for this calendar year, with $10 million of that being recurring receipts.
One of its stated goals for 2021, apart from reaching breakeven, is to enhance the quality of its revenue.
This, Kroell said, means “diversifying into new segments, particular around its recurring revenue”. He mentioned food and beverages, and power generation, as the two industries De.mem would focus on over the next year.
The company has recently tapped the capital markets in order to fund its acquisition and develop the Build and Operate segment further. It’s raised around $9 million from institutionals, and is about to undergo a Share Purchase Plan for existing retail investors for around $1.2 million.
The De.mem share price has risen by more than 130 per cent over the past 12 months.
This article was developed in collaboration with De.Mem, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.