A drought of ?pure water' plays

PORTFOLIO POINT: Investors keen to back companies with a 'pure’ water focus have a limited choice, and that choice could be about to get smaller.
It’s been a fairly dry argument for Australian stockmarket investors wanting to invest in the water sector. The ASX has many companies with water-related business activities, but few can be described as “pure” water investments.

For most companies, water-related activities form only a small or very small part of their business. Research by Eco Investor found only four companies that could be described as pure water plays, and perhaps half a dozen others where water management is a significant or important part of their business.

Below this are a large number of companies that provide water products, services and expertise, but water management is not their core business activity and contributes a minority or small minority of their revenue.

Nor does the ASX have a history of water-focused companies. In recent times there have been only two water companies that have been acquired and delisted: CDS Technologies and Neverfail Springwater.

Neverfail was the best-known, having helped popularise the bottled water trend in the 1990s. Although there is some debate about the environmental friendliness of bottled water, Neverfail was very successful and became a member of the All Ordinaries index until it was acquired by Coca-Cola Amatil in 2003 in a deal that valued it at $292 million.

CDS Technologies was delisted in October 2007 after it successfully sold its UK and Australian businesses to a Canadian company for $21.5 million and its US business to a US company for US$56.375 million – and returned to shareholders a combined $85.5 million.

The company’s intellectual property was a continuous separation technology that could remove solids from liquids in the stormwater, wastewater and water recycling sectors. It was used, for example, by municipal councils to remove litter from stormwater. CDS retains another water subsidiary, Process Wastewater Technologies Inc, but this is an early-stage business and operates at a loss.

Another pure water company that may soon be lost is Island Sky, which has received a takeover offer from US consumer products company Applica Water Products LLC. Island Sky acquired Island Sky Corporation, USA, which owns the US and international patents for a technology that can extract water from air. Earlier this year Island Sky started manufacturing a small consumer unit and plans to launch a larger unit in 2009.

Island Sky listed in December 2007 at 20¢ a share and if shareholders vote for the merger on 15 January they will receive 45¢ per share.

nAustralian Water Management Companies
Company	Type of business	Total assets ($m)	Net assets ($m)	Revenue ($m)	Profit/loss ($m)	Share price $ Nov 28
Water Focus
Hydrotech International	Water Efficiency	5.2	4.8	0.163	-5.639	0.03
Island Sky **	Water production	5.1	5	1.056	-0.471	0.36
Phoslock Water Solutions	Water Quality	6.2	4.6	0.721	-3.402	0.1
Refresh Corp	Distilled Water	4.9	4	5.148	-0.079	0.07
Significant Water Activities
Green Invest	Green Plumbing	8.8	5.7	3.159	-1.556	0.3
GWA International	Water Consumer Products	775.4	389.1	648.902	45.89	2.37
* At June 30, 2008 ** Half-year to June 30, 2008
Source: Eco Investor

If the takeover proceeds, the ASX will be left with three pure play water companies.

Hydrotech International is commercialising a system for preventing water damage to the foundations of buildings and structures made of concrete and brick, such as basements, underground car parks and stations, and tunnels.

In 2006 Hydrotech acquired the intellectual property rights for the Multi-Pulse Sequencing (MPS) technology, an electro-osmotic system that can dry out subterranean masonry structures and keep them dry. This works through low voltage pulsations that run through cavities built into the walls. The charge ionises the water molecules, which then travel towards the negative electrodes and can be drained.

A CSIRO technology that has been 15 years in development is being commercialised by Phoslock Water Solutions. The product, Phoslock, reduces the concentration of orthophosphate in water and can give long-term control over algae, including blue-green algae. It can clean up and prevent further outbreaks in rivers, lakes, reservoirs and other water bodies. The company is developing markets in a number of countries.

Refresh Group is a supplier of pure distilled water and natural spring water and claims to be one of only two national companies suppling bottled water to the home and office markets (the other is Neverfail). Refresh also supplies the main supermarket chains and says distilled water has numerous commercial applications where high purity is required. These include dental and medical laboratories, surgeries and industry.

The problem for investors is that all four water-focused companies are small, early stage and high risk – all made a loss in 2007-08 and with no profits there are also no dividends.

A respectable number of companies do have significant water management businesses, with perhaps the most substantial of these being GWA International. GWA is a manufacturer of consumer building products that include the well known Caroma Dorf, Fowler and Irwell toilets and taps, and other bathroom and kitchenware products. GWA has a history of water efficiency innovations including dual-flush toilets that, over time, have more than halved water usage. It has also developed waterless urinals and systems that reuse basin water to flush toilets.

Some companies offer water management services as part of a wider environmental focus. Intermoco is an energy and water management company that helps clients to manage and reduce their energy and water usage. Green Invest has three business segments, one of which is Green Plumbers, which trains plumbers to install water saving systems such as rainwater tanks and dual-flush toilets. Other such environmental stocks are Environmental Group, Aeris Environmental, Clean TeQ, Solco, and Transfield Services Infrastructure Fund.

There are a good number of businesses with water management products among their range, such as Nylex with its rain water tanks and hoses, Alesco with a portfolio of businesses that includes a Water Products and Services division, and Gale Pacific with its fabrics that also have water storage and conservation applications.

Much water expertise is locked up in engineering firms. The larger the firm, the more likely they will offer a suite of engineering services of which water is only one. Among such firms are Cardno, Coffey International, WorleyParsons and Saunders International. The ASX has a small number of international water stocks: the Credit Suisse PL 100 World Water Trust is a fund of 15 leading international water stocks; and the TAPS Trust is an income based investment in the Mid Kent Water Utility in south-east England.

So, despite the huge impact that the way humans manage water can have on the environment – both life and landscape – and the massive fortunes to be made by doing it better, it is still very early days in the world of water business and water investment.

There is plenty to drink, and with a lot of exotic flavours, but not much of it is pure water, not yet.

Island Sky

Island Sky (ISK) is commercialising a technology that makes true one of the ultimate water dreams: making water from thin air.

By taking humidity from the air and turning it into potable water, its air-to-water technology can provide low-cost, high-quality drinking water. The system can be used in crisis areas where there is pollution or an emergency through to suburban homes where people are spending large amounts of money on bottled water and apparatuses that filter water.

The technology uses vapour compression to increase the dynamics of condensing water vapour. The company says the technology “continuously simulates the “dew point” allowing water to be collected even in low-humidity conditions. Air is drawn through a filter that removes dust and purifies the air. As water is condensed it is then collected in the water storage vessel and the entire water system is purified with ozone, which is EPA and FDA approved. In the final stage, the water passes through a high-quality carbon filter, which enhances the water’s taste.”

The company has two products. The Skywater 14 is for home and offices, and the Skywater 300 is a larger outdoor unit that will be introduced in 2009. Island Sky claims both products significantly outperform other devices by producing more water in a 24-hour period and using low power consumption; and that they make more water in low humidity conditions than any other machine in the world.

The company says the Skywater 14 can produce up to 227 litres a day in optimal conditions, and 11 litres per day at 40% relative humidity. The unit plugs in and needs no plumbing or assembly. It is able to provide drinking water economically to remote areas, and significantly cheaper than the price of bottled water. When temperature and humidity fall below 30%/15.5 degrees Celsius the machine automatically shuts off until the temperature and humidity rise, settings that maintain energy efficiency and prevent damage to the machine.

The Skywater 300 unit can extract up to 1100 litres a day. The machines can be bundled together for housing developments, greenhouse irrigation and light industrial use.

Island Sky says it is developing larger machines for villages, small-scale farming, mobile units for emergency use, and units powered with wind and solar technology. Island Sky is an early-stage company that acquired Island Sky Corporation, USA, which owns the US and international patents for the air-to-water technology. It listed in December 2007 at 20¢ a share. Much as happened since then.

In January it started manufacturing in China. In May it signed a $US5 million licensing distribution agreement for India and later South-East Asia with US company Salton Inc, and in October it received a $2 million instalment.

In July it announced a distribution agreement with US based SDI Inc, under which SDI would over five years buy $US65.4 million worth of Skywater 14 products. In August it raised $4 million in a placement to Salton at 25¢ a share.

In its first half-year of trading, to June 30, it made revenue of $1.05 million and a loss of $471,353. Despite the early days, the commercialisation appears to be travelling well. However, shareholders may not see the full rollout, as last month Island Sky signed a conditional merger agreement with US consumer products company Applica Water Products LLC, a subsidiary of Salton Inc. Applica is offering 45¢ a share, valuing Island Sky at $56.4 million. Some of Island Sky’s US based shareholders, including the founders, would have a minority stake in the merged group.

The scheme booklet will be sent on December 16 and a shareholder vote is planned for January 15.

Victor Bivell is editor of Eco Investor.