Water Purification IPO landscape

HaloSource‘s $80m IPO on London’s AIM market marks another interesting listing. Origo Partners and Masdar Clean Tech Fund are among some VC funds that were able to orchestrate a nice (partial) exit in this difficult economic period. Net proceed raised are some £28.9m. Other selling shareholder include Unilever Swiss Holdings AG, Britannia Holdings Ltd, and Washington Research Foundation.

We like to look back on the thesis for the water industry in general and with regards to Water Treatment and Purification in particular. Arthur D Little published a report back in 2008 title ‘The Water margin: How strategic management of water can grow business value‘.

ADL’s report cites Foster’s brewery in Australia. Foster’s embarked on a programme to minimize water consumption per unit of output without compromising quality. ‘Foster’s Yatala Brewery, the most water efficient brewery in the world, uses just over 2 litres of water for every litre of beer which is less than half the international standard of 5 litres.’ Moreover, the brewery doubled its capacity but water consumption only increased by 10-15%. The key observation that is drawn is that ‘water management needs to be embedded throughout the organization. This may require behavioural change, process innovation, systems innovation, skills development and more.’

We agree and would add that any change is difficult and the cultural backdrop important. Australian’s have learned to adopt to their natural water supply levels whereas many Western Europeans and Americans are still ignorant and lavishly use water. As this example shows, corporates do worry about water efficiency and addressing it itself leads to a competitive advantage. Whilst the West is concerned with efficiency, the company HaloSource is concerned about getting clean water to people in the first place.

Thus HaloSource addresses different markets. Markets that notoriously are challenged to get access to safe and clean drinking water. We note that the firm’s revenue mix is somewhat concentrated and water clarification is currently the firms core product accounting for some 87% (YE2008) of group revenues. Core clients are Eureka Forbes and Pool Corp, which represent 28% of group revenues.

The latter firm mainly operates in the seasonal swimming pool business whereas Eureka enhances the life of many poorer communities especially in India. We consider Eureka be a risk factor as product substitutes are ample. The question is whether there will be any margin pressure on HaloSource going forward. Euraka is owned by Shapoorji Pallonji Group. Pool Corp. business is very seasonal and we could not make out whether HaloSource is hedging this business with derivatives to reduce the likely volatility in revenues.

To date, HaloSource has accumulated operating losses of $46m whilst revenue are growing at a reasonable rate. With 2009 gross profit of around $5.8m there is likely to be a significant J-curve before HaloSource will ever be profitable. The business risk is still significant as the order books is still relatively dependent on a few core buyers. Should anyone switch product this could materially affect the performance of HaloSource.

To conclude, HaloSource is a company worth watching. We have seen big corporates buying up assets in this space and HaloSource may become a target for one larger player if it can proof to be profitable in medium term. Previously we reported on Zenon which was snapped up by GE for a reported $650m. Other players that are active in this market are Dow Chemical and 3M.