Israel-based wastewater technology company, Emefcy Group Ltd (ASX: EMC), debuted on the ASX in December 2015 with a share price of 20 cents and market capitalisation of $35 million. Just over six months later Emefcy's shares trade at 73.5 cents valuing the company at just under $150 million.
Product
Emefcy's Membrane Aerated Biofilm Reactor (MABR) products enable wastewater to be reused for specific purposes such as crop irrigation. Both low cost and energy efficient, this solution is designed for remote areas, invariably in poor parts of the world that suffer from severe water shortages.
In contrast, conventional wastewater treatment is uneconomical for these regions as it involves the use of huge centralised plants and extensive pipe networks.
Track Record
Emefcy made its first commercial sale in February to an Israeli customer, but has since followed up with deals in the Caribbean and Africa. The company already boasts an $18 million sales pipeline and hopes that these early contract wins will provide valuable reference sites to enable future sales.
"Water-as-a-Service"
From next year, Emefcy plans to improve profitability by selling "Water-as-a-Service" (WaaS) in addition to selling plants. It hopes to engage financial partners who will pay for the plants upfront and share in the future revenue streams.
Since Emefcy's solution is so much cheaper than alternatives, the company claims customers will achieve lower operating costs whilst avoiding upfront capital expenditure altogether. On paper, WaaS is an attractive business model but is as yet unproven.
China: A Land of Opportunity?
Today, Emefcy announced its strategy for entering the $20 billion Chinese market. The company is looking to tap into Chinese Central Government funding announced earlier this year that will be used to increase the treatment of wastewater from 10% to 70%. Initially, Emefcy is aiming to be ready to do business in China by Q2 2017, and is ultimately targeting market leadership.
Finances
At 30 June 2016 Emefcy had US$6.1 million in cash with a current quarterly cash burn of around US$1 million to US$1.5 million. The company's existing production facilities support $30 million per year in sales, but revenue in the low-single digit millions is the most likely outcome for next year. There are plans to develop further production capacity in China in the coming months so I would expect a capital raising in the near future.
Valuation
Early stage companies such as Emefcy are very difficult to value. The company appears to own some ground-breaking intellectual property and is targeting a huge global market, but this tends to be the case with most start-ups that make it onto the ASX otherwise they would find it impossible to raise capital. Most such companies never turn a profit and end up being lousy investments.
However, I must admit that there are some impressive achievements listed under the names of the board of directors which could be significant if you believe that "success breeds success".
Also, the company has done well to sign its first $1 million of contracts so soon after listing and is on its way to becoming a sustainable business. Until then, I will continue to watch with interest from the sidelines.
