Friday, April 17, 2015

Modern Water: When Push Comes to Pull

In an article published on March 31st about attempts by OriginOil, Inc. (OOIL:  OTC/QB) to penetrate the oil and gas fracturing market with its waste water treatment solutions, I mentioned a company called Oasys Water, Inc.    Oasys provides desalination services to shale gas producers and I incorrectly identified their technology as that of reverse osmosis.  In fact, Oasys uses an alternative process called ‘forward osmosis.’

Like the reverse osmosis that so many of us are familiar with through water softening and purifying systems at home, forward osmosis relies on a permeable membrane.  However, in forward osmosis a high concentration ‘drawing’ solution is used to pull water through the membrane into the solution.  It requires much less energy than reverse osmosis that relies on hydraulic pressure to push water through the membrane.

Oasys is not alone in capitalizing on forward osmotic technologies.  HTI Water Technology uses its proprietary forward osmosis process for portable desalination systems that can be used in remote locations by the military or rural development groups.  Like Oasys HTI also offers solutions to the oil and gas industry and municipal water systems for waste water filtration and treatment.

Investors can take position in forward osmosis through a third water solution provider, Modern Water Plc (MWG:  LON).  The company is a self-described specialist in membrane systems.  It is the first to put a commercial desalination system into operation using forward osmosis.  Commissioned in 2012, the Al Najdah system in Oman is capable of processing 200 cubic meters of clean drinking water per day.

Modern Water does not rely exclusively on the desalination market, which is widely recognized as subject to fitful demand.  The company offers a mix of waste water solutions for industry using its thermal, forward osmosis and other membrane processes.  It claims installations on five continents.

In 2014, the company reported BP2.8 million (US$4.1 million) in total sales.  Unfortunately, administrative expenses outstripped revenue, leading to an operating net loss of BP4.5 million (US$6.6 million).  Reported earnings in the year appeared even worse since the company had to take a BP12.6 million (US$18.3 million) write down for impairment of goodwill and intangibles.

Modern Water has some time to build sales.  At the end of December 2014, the company still had a cash nest egg of BP6.8 million (US$9.9 million).  Based on the company’s recent cash usage of BP4.5 (US$6.6 million) in the year 2014, Modern Water should have another twelve to fifteen months of breathing room before there is a need to visit the capital market.

Investors might think Modern Water looks more like one of its permeable membranes than a solid company with compelling investment thesis.  Importantly, over 750 million people around the world or about one in nine persons lack access to safe water.  If industry and agriculture are to continue to use water at current rates, clean up will be absolutely imperative.  As the dynamics of water shortages unfold around the world, we expect companies like Modern Water to benefit.   As a consequence I believe investors could see higher stock prices as well as news of mergers among the smaller operations like Oasys and HTI.    

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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