The market can be an unforgiving place when expectations are dashed – though often the punishment can be disproportionate to the crime.
For investors, this presents an opportunity; a chance to get into a growth stock well below its real valuation.
Waterlogic (LON:WTL), the maker, installer and vendor of mains-fed water coolers, has felt first-hand the wrath of investors.
Teething problems in bringing its new consumer offering to market, allied to the rather tepid performance of the indirect business, led the group to warn on profits.
However, this is likely to be a temporary setback, and the latest guidance reveals the business will probably post revenues of US$120-$125mln (up from US$101mln) and underlying earnings (EBITDA) of US$20mln (up from US$14.7mln).
For investors, there is an opportunity. The shares, which were changing hands for more than £2 in May, are now worth 103p. This values the group at £80mlmn, or just 6.5 times underlying earnings (EBITDA).
Management think the stock is cheap and there has been a rash of buying since the interims on September 16. Only time will tell whether they are correct.
Certainly what the directors and those others who have acquired shares recently are buying into is a strongly profitable, cash generative business where 50% of the revenues are recurring (from 18% in 2009).
ADDED INTERVIEW WITH Waterlogic CEO
So far, we have skirted around exactly how the AIM-listed group makes its money. The product it provides is a fairly straightforward plumbed-in unit that purifies at the point of use – i.e. in the office or canteen in which it is installed. The dispensed water is certified as 99.9999% pure, and can be provided hot, cold and sparkling.
It is significantly cheaper than traditional bottled water and the huge plastic bottles used to fill the old traditional water coolers. It is also more environmentally friendly than the bottled alternative and “hassle free”, chief executive officer (CEO) Jeremy Ben-David said.
The units, which are made by its fully-owned manufacturing business in China, are either rented to companies directly, sold to them (with a maintenance contract), or installed indirectly by partners, often as part of a much larger contract.
The group also has a network of resellers in territories where it doesn’t currently have a presence.
The company used to boast of an addressable market of around US$2bn a year, which was based on commercial sales to businesses in the US and Europe.
However, its market has increased to US$14bn since the development of its Firewall products aimed at consumers as well as businesses, using ultra-violet technology to purify at the point at which the water is dispensed.
Firewall eliminates the chance of contamination from the nozzle from which the water is dispensed and is a huge leap forward in technology that creates two massive opportunities.
The first is the consumer market, and the group has developed a range of models for the home that are being sold by partners such as Indesit Hotpoint. It will market under the Waterlogic name in Japan through its distribution partner, Alconix.
The Firewall technology also has a ready market in emerging nations such as India, where water quality is still an issue, and the company has a distribution agreement with Eureka Forbes
The competition for the company is still traditional bottled water, where the group has a significant edge.
There are companies that install point of use units, but none have the economies of vertical integration provided by Waterlogic’s manufacturing arm.
And it is this, allied to the ability to reduce central costs such as marketing spend, which provides an instant win when Waterlogic makes bolt-on acquisitions. The cost of sales drops, and profits instantly rise.
Its largest deal to date was done in Australia, where it bought Cool Clear Water, a company that turns over A$16.9mln and made EBITDA of A$9.3mln. It acquired Culligan as part of the same deal, sewing up a further A$6.9mln of revenues. The total cost was A$60mln, though this has given the group a fairly significant base in Australia.
It means the group is carrying net debt of around US$35mln, although it still has headroom with its lenders and cash of US$13.8mln that will finance other, probably more modest, bolt-ons to the business.
It is interested in expanding its footprint on the West Coast of the US, where last year it acquired three companies, and in Germany plus possibly France.
On the potential of the consumer business, Ben-David is still upbeat, although recent experience has made him a little more circumspect with his analysis of the opportunity.
“We had the idea of going into the consumer market and came under pressure to make forecasts for how long it would take to get products out. Of course, when you’re partnering with major international companies you can’t always dictate the timetable,” said the Waterlogic CEO.
“Developing the technology and finding the customers; it all takes time, but we know that now, and are pleased to be rolling out products to consumers in Japan, Turkey, Russia and Italy.”