Shares in Value Logo
Product Review Img Vertical

Date : 29/03/2021

De.mem Limited

ASX :

DEM

Market Cap : $47.40 Million

Buy

52 Week Range : $0.10 - $0.35

Share Price : $0.27

De.mem equity raise has resulted in a consolidation - an opportunity for investors to "Buy" a top quality company that is growing very quickly, both organically and by acquisitions.

Company Analysis

De.mem (ASX: DEM) was first introduced to our members at a price of $0.24 a share back in November 2020. Since then, the stock surged and posted a 52-week high price of $0.35 a share earlier this month. The stock was then put on a trading halt and De.mem announced that they will be raising capital by way of a Private Placement and a Share Purchase Plan – consequently resulting in a pull-back and allowing investors who do not hold positions yet, to consider gaining exposure to a company that will be playing a key role in the all-important wastewater treatment industry.

Last week, we advised our eligible members to participate in the Share Purchase Plan on offer. Our email contained all the details of the SPP, including the important dates. For newer members who missed out on our initial report on De.mem, we believe consolidation given the equity raise opens an opportunity.


Source: Tradingview.com

De.mem is a Singapore-Australian wastewater treatment firm that is based in Melbourne. They design, build, own, and operate de-centralized water and wastewater treatment systems for its customers in mining, industrial, municipal, F&B, and residential sectors. The primary technology that is used for its operations has been licensed from Singapore’s Nanyang Technological University (NTU) – one of the best membranes & water research institutes in the world. The leveraged technology is to have brought benefits such as lower power consumption and simpler system architecture which has led to DEM reducing its operating expenses and capital expenditure.

De.mem operates across the below industries/markets by offering portable water supply and wastewater treatment solutions. They have 5 specialised products on offer. The details of all their operations can be read in our earlier report by clicking here.

  • Mining
  • Infrastructure/Municipal
  • Food & Beverage
  • Other Industrial

Company Updates

Since the earlier report, there have been a few operational updates by De.mem:

  • De.mem received an order from the Australian Energy Sector that is worth $550,000. This is the second contractor in the Australian power generation sector, adding to the $400k contact from September 2020. The new customer is AGL Energy for the delivery of water treatment equipment at their power station. Being a high-quality institutional client, this is a huge win for De.mem that shows that their product is well trusted at such an early stage.
  • De.mem announced earlier this month that they will be acquiring Capic – a Perth based supplier of chemicals that is able to operate at high margins. Capic’s customers are blue chip Western Australian mining companies and would fit in very well and bring synergies into play with De.mem given that their target markets are very similar. The acquisition adds scale and diversification to De.mem’s business. The deal is estimated to be worth $5.1 million – with $3.7 million being paid by cash and $1.4 million by way of shares.
  • $9 million Placement Offer to Institutional Investors at an issue price of 28 cents a share. In addition to the institutional placement, De.mem is also targeting to raise $1.2 million via a Share Purchase Plan (SPP) that is made available to eligible shareholders. De.mem will be utilising the funds towards acquisitions, working capital, organic growth initiatives, and of course, transaction costs. Post the capital raising from SPP, De.mem’s balance sheet will be further strengthened, and their cash balance will sit around the $11.5 million mark.

FY2020 Performance

De.mem has had a record-breaking year financially and operationally. They have turned cash flow positive in the last quarter of the year. Operating cash outflow during the year was reduced from $1.7 million to $1.1 million.


Source: De.mem

  • Inaugural operating cash flow positive of +$544k in December Quarter 2020.
  • Strong sales growth, with +41% customer cash receipts growth to $16.5m during CY2020.
  • Substantially improved revenue quality, with growing recurring revenues and diversification.
  • Substantial growth of strategic business acquisitions.
  • Strong balance sheet, with $5.4m cash and term deposits as of 31 December 2020.
  • Strong outlook, with ~$14m CY2021 visible revenues (~$10m recurring plus ~$4m contracted revenues) and strong momentum.

The increase in revenues and decrease in operating expenses resulted in De.mem increasing their gross margins to 31% from 26% a year ago. The quality of the revenues coming should be taken note of as well due the recurring nature of them. This will ensure that recurring revenues will keep coming in and will make their entire financial position very sustainable in the medium to long-term. Recurring revenue percentage has increased to 58% in the recent period.


Source: De.mem

The diversification of the revenue streams is another area that should also be noted. De.mem now has customers from the below industries:

  • Sustainable Agriculture – $2.6 million contract
  • Energy/Power Generation – $950k contract including the AGL deal
  • Food & Beverages – $800k contract
  • Mining & Resources – $500k contract
  • Real Estate & Infrastructure – $200k per annum contract

De.mem is contracted with the likes of RIO, Coca cola, Inghams, AGL, and a host of other blue-chip companies. In addition to this, De.mem’s acquisition will add further growth to the company and improve its operating efficiency.

Total Addressable Market

The wastewater treatment market is expanding as sustainability rating agencies have shown that they are not afraid to dish out scathing reviews and ratings to companies that are not following the unstated ethics code. We are not seeing a lot more companies reporting on their environmental, social, and ethical standards and practices that they are following. With the expansion of sustainability finance, modern day investors are shying away from companies that do not follow the sustainability practices – thereby expanding the total addressable market for the water treatment market.

As things stand, the water treatment systems market in Australia has risen to $300 million. This cross sells into the larger pumping and chemicals market that has a value of $2 billion per annum. In Australia, this area is very fragmented with small operators offering limited products and solutions – making it very difficult for institutional companies to take up these services as the supply levels are just not up there yet.

Globally, the water treatment system has a total addressable market of US$21 billion and it has been growing at 10.4% per annum since 2015. The growth has been driven to curb water pollution, water scarcity, and environmental regulation. The large, centralised plants for water treatment have proved inefficient, requiring large capex and lengthy deployment, and this has benefitted De.mem’s decentralised, modular approach to wastewater treatment.

Capic Acquisition

The acquisition of Capic brings a lot of synergistic potential to De.mem. Capic has over 50 mining clients, supplying speciality chemicals to several blue-chip companies such as BHP, Northern Star, Pilbara Minerals, Iluka Resources, etc.

Therefore, Capic generates stable revenues. The 3-year average for their revenues sits at $3.3 million with a normalised EBITDA of $600,000 during the same 3-year period. The $5.1 million thus comes in at 1.3x revenues. For De.mem, the deal gives them access to an expanded product range, entry into a Western Australia – a strategically important geography that contains a lot of mining and infrastructure companies. The mining sector is also underweight for De.mem as they do not yet generate significant revenues yet, however, this deal will bring the biggest mining companies of Australia within the reach of De.mem’s other products and solutions.

The synergies from the acquisition can be seen in the table below:

Synergy De.mem Capic
Revenues $16.5 million in 2020 $3.3 million (3-year average)
Geography Brisbane, Melbourne, Adelaide Western Australia
Products One-stop-shop for water treatment Speciality Chemicals
Customers 100 Clients 50 Clients
Cross Selling Average contract value – $881k Average Contact Value – $66k

Financial Forecasts

With an exceptional financial performance in 2020 and the acquisition of Capic, the expectations are high for De.mem. The firm has stated that they have $14 million of revenues that are clearly visible to them for the year 2021. In addition to this, Capic is also expected to maintain its average and bring in $3.3 million of revenues once the acquisition is completed.

De.mem’s average contract value is $881k and 2021 is expected to have more deals and contracts that 2020 given that the wastewater treatment industry is expanding in Australia and globally. Being a Singapore-Australian firm, De.mem’s reach into markets outside of Australia is also easier to reach – giving them a competitive advantage.

Therefore, we expect revenues to continue growing at high rates – organically and via acquisitions. Following the placement offer and SPP, De.mem is expected to have over $11.5 million in cash. With the Capic acquisition estimated to cost $3.7 million in cash, this puts De.mem in a very strong financial position. They will have close to $8 million in cash for 2021. In the recent quarter, the firm also reported that they were cash flow positive. Our models show that De.mem will become profitable in FY2022 and there will be significant progress made in 2021. Their annual operating cash outflow has also decreased and thus we are expecting De.mem to make it through 2021 without raising capital again, unless of course, a significantly large contract is entered into that may require huge initial outlay from De.mem. This event would also likely trigger a sharp positive share price reaction.

Recommendation

De.mem is a top-quality company that is close to turning profitable, let alone generating revenues. Their acquisitions add synergistic value to the already expanding market and market penetration that De.mem has managed. Coming from a record year, we expect De.mem to push ahead and make significant strides in 2021 as revenues and earnings is forecasted to increase. We recommend long-term investors to “Buy” during this consolidation and at a time when they are raising enough equity to take them through operating in 2021.

 

Scroll to Top

Login

By submitting this form, I agree to the TERMS AND CONDITIONS and PRIVATE POLICY