Shares in Value Logo
Product Review Img Vertical

Date : 12/11/2020

De.mem Limited

ASX :

DEM

Market Cap : $43.01 Million

Buy

52 Week Range : $0.100 - $0.315

Share Price : $0.240

A stock with good future potential. It is close to becoming profitable and it has a very strong balance sheet. We recommend members to "Buy" at current price levels.

Company Analysis

De.mem Limited (ASX: DEM) 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.

DEM’s products are installed on-site for its clients and they offer a sustainable solution to recycling water than the traditional process of transporting wastewater to brick & mortar large treatment plants. The on-site installation offers their clients customisation capabilities and is hence, an added benefit along with it being a much more cost-effective service. Once a product has been sold or installed at the client’s location, it then has to be maintained. Membranes, chemical solutions, and other consumables require constant attention for its smooth operation, and this is where DEM recurring revenues kick-in.

Products & Services

To sum things up, DEM builds, owns, and operates their decentralized water treatment plants at their client’s site location for a fee. These products then have to be operated and maintained. Hence, generating recurring revenues from consumables and chemicals that are necessary for smooth functioning. This essentially turns the firm into a one-stop-show and that is exactly how DEM have been marketing themselves. All of this is possible as they leverage NTU’s patented water membrane technology.

De.mem offers the below solutions through their product and services:

  • Portable Water Supply
  • Sewage Treatment
  • Industrial Wastewater
  • Recycling
  • Desalination
  • Process Water
  • Automation

As the importance and requirements of all of the above solutions are already known to pretty much everybody, we will not go into each one of them. The Automation solution enables the automation of the water treatment systems and easy performance monitoring.

Markets

De.mem currently has clients from 4 different markets – mining, infrastructure/municipal, food & beverage (F&B), and oil & gas. Most of these clients are big-name blue-chip companies such as Rio Tinto, Mulpha, Givaduan, etc.

The mining industry requires portable sewage treatment plants at their mining camps, supply of water for mine operations by recycling wastewater. Wastewater management is always important for mining firms as they have to abide by discharge limits that have been set by regulators. DEM offers all of this through their product.

DEM works with municipal councils, governments and infrastructure developers in Australia and other parts of Asia for the development of modern water and sewage treatment plants. Hotels and resorts are some of the key markets that the firm has been targeting. Supply of fresh clean water is another solution that can be provided as their technology has no problem in dealing with water from lakes or oceans.

One of the largest markets that may see growth in the future for DEM is the huge F&B and agricultural industry. Both industries require huge amounts of water. The climate of Australia does not always favour agriculture given the extremities we have seen in the past few years and it becomes absolutely necessary to manage wastewater and recycle. Breweries and wineries are also big markets among the F&B sector that need a constant supply of water and with the use of DEM’s services, a lot of money can be saved for these firms.

Oil & gas industry requires high volumes of water as well to support its activities and just as the mining industry, wastewater management is a priority for these firms due to government regulations around toxicity. The customised construction of systems that DEM offers enables these firms to optimally manage their needs and the continuous requirement of services mean that DEM’s recurring revenues will grow and become a larger part of its total revenues.

Company Updates


Source: Tradingview.com

The stock has recovered well since the crash in March. Given the early stage DEM is in its business cycle, it is exposed to volatility. However, it has had a stellar first half year in FY2020 and it is also on track to meet its guidance for the entire year. All material service contracts have survived the test by Covid19 and the firm has been relatively not impacted much. Profitability is still in question for the firm. However, it is not a long way off as sustainable revenues are being generated.

De.mem operates in Australia through Akwa-Worx in Queensland. Recently, De.mem has signed quite a few contracts and had a record half year ending June 2020.

  • A $2.6million seawater desalination plant near Brisbane for Sundrop Farms has been contracted where DEM is set to design, manufacture, and commission the plant. The revenues are set to be recognised in FY2021.
  • $400,000 contract for the design of a water treatment system that delivers ultrapure, deionized water has been entered into in September. The facility is being used in the energy sector for power generation – opening up a pathway for further diversification.
  • Givaudan has contracted De.mem to build, own, and operate a wastewater treatment system in Singapore for $800,000.
  • Recurring revenues of $200,000 per annum is expected to come in as DEM wrapped up a 2-year contract for the supply of consumables and chemicals to an infrastructure firm in Australia.
  • DEM launched a new product to take advantage of the demands during the Covid19 outbreak by supplying disinfection products such as sanitizers and surface disinfectants.

Industry Analysis

Increase in awareness on the rise in water pollution and scarcity of water has resulted in several regulations to be set-up by authorities. This has given rise to the water treatment marker. The application spans across several markets and industries as we stated earlier in this report.

The climate in Australia is not favourable for sustainable supply of rainwater for agriculture and other industries. With global warming on the rise, the need to save water by increasing the reusability of water by processes such as wastewater treatment and recycling has been increasing.

The global decentralised water treatment systems market has been growing at 5% year-on-year with much of the growth to be driven by South East Asian countries in the next 5 years. Australia is also a very lucrative market for DEM as there are quite a lot of mining and agricultural firms that require such services. There is lots of potential for organic growth for DEM in its current operating markets – Australia, Europe, and Asia.

Investment Thesis

De.mem is not profitable yet. However, it is making a strong case to turn profitable by FY2022 according to our estimates. Revenues have become more predictable off late – which is the first step towards profitability. The firm has had a record half year in 2020 and even if they just keep up with guidance forecasts, FY2020 should generate between $16 million to $18 million in revenues – making it the best year on record for revenues generated. From here on, we expect the firm to grow at an average rate of about 20% year-on-year.

Recurring revenues have been on a rising trend since the past 3 years and we expect this to continue as well. In 2018, recurring revenues was just 38% of the total revenues generated. Fast forward two years, recurring revenues are forecasted to be in the 50% – 60% range at the end of FY2020. The increase in the weightage of recurring revenues is the second step towards turning profitable. This is because the revenues become much more predictable and sustainable. Recurring revenues are the cornerstone of any business that wants to operate with an as-a-service business model.

Gross margins for the firm have been reported to have been 32% during the first half year of FY2020 – an increase from 29% that was seen in FY2019. Margins increase as the firm scales up as it can take advantage of the phenomenon – economies of scale. With recurring revenues increasing, the margins will increase as well as the costs for servicing existing clientele with consumables is significantly less than adding new clients and building plants and facilities for them.

DEM has a cash balance of $6.2 million as of 30th June 2020. The firm has very low levels of debt – $929 million. The short- and long-term financial health of DEM is strong. The firm is not in danger of any sort of credit default risk. The net debt position is good, and the total assets exceed total liabilities by 2.7x. The capital structure of the firm shows that it is capitalised by equity to the extent of 90% and the remaining 10% by debt as of June 30th half year report.

The outlook for DEM is positive. The firm has a strong pipeline for new clients and recurring revenues are sustainable. Geographical diversification has already begun with DEM now operating in Australia, Singapore, Vietnam, and Germany. An expansion into New Zealand and other countries in the APAC region is expected.

While the service and solutions outlook strong, the product and technology development match up equally. The partnership agreement with NTU ensures that R&D is a continuous process and NTU already has a very good reputation for advancements and breakthroughs. The IP portfolio is estimated to expand as well with the addition of new patents.

With increase in margins recently, the firm may soon be in a position to generate profits. However, our forecasts suggest that there may be one more equity raise coming before the firm can service all of its operating costs from its revenues.

Recommendation

The financial performance is expected to be strong come the end of the year and DEM has a good forecast of revenues and is close to becoming profitable. The business model has two revenue streams – contracted and recurring revenues. While there is a good pipeline for the former, the latter ensures sustainability and steady growth rates. The financial health of the firm is a position of strength and it looks like it is trading below its intrinsic value. We recommend members to “Buy” for the long-term.

Scroll to Top

Login

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