Energy Recovery, is the latest addition to publicly available investment
vehicles, for the world’s looming water problems. They sell
technology that reduces the fraction of unused energy during sea water reverse
osmosis (SWRO), one method of desalination. They are tentatively scheduled to
IPO today. Nobody, that I’m aware of, has commented publicly on the deal,
specifically with respect to either the economics behind SWRO plants nor the
valuation of the target $7 - $9.
With respect to the economics behind the plants they sell to, they are
popping up all over the world, so the numbers must work. It’s obvious the
customer base will likley continue to grow. I didn’t quite finish my research
in time for the IPO, but, I was curious as to what fraction of the bills of a
new plant are likely spent on technology like Energy Recovery sells. To try and
estimate the size of the market. It turns out, that if you look at 5 case
studies of plants built in 2001, they spent approximately 1.56% on energy
recovery, in their initial capital costs. To give you some estimates for your
own unit conversions, a $6.5M plant can yield 4800 m^3/day, while a $540K
investment can yield 250 m^3/day, which could mean up to $109K in sales for ERI
at the large plant, and as little as $8.2K in sales at the smaller plant. So
that means once I, or somebody else, adds up the estimates in the chart below,
using each countries currently installed capacity….well…you get the idea. It’s
on the order of low 10’s of billions, that’s my guesstimate, based on
reading.
Projected Desalination Installed
Capacity—All Feedwater Types (2005-2015)
Reading over the Energy
Recovery prospectus, (I’m not done yet) it sounds like, they don’t really
need the money going forward and they aren’t selling a large fraction of the
shares outstanding. They are pricing themselves between 53.8x and 69.2x trailing
twelve months earnings, on the undiluted share base. To me, this looks
like, the owners are saying to themselves, if somebody is willing to pay THAT
much for a slice of this growth, I guess I’d sell SOME (new) shares. Energy
Recovery, sells a technology that is selling great right now, but it’s in a
field that is in the first or second inning, and likely their management is more
on top of the developments from companies like Pump Engineering, and Siemens.
I’m not sure I want to be buying, what they want to sell, but this is inherent
risk behind IPOs. Since sales are lumpy, and multiples are so stretched, I see
no reason to jump on this stock on the first day, it certainly isn’t a bargain
higher than $9. But, likely the street will prove me wrong.By the way, there are
a few other interesting graphs, provided in the prospectus, created to make
either the growth jump out of the page at you or in some other way make this
look like a great investment. Here’s one:
Relative Operating Costs of the
Desalination Process as of 2006
By the way, the competitors over at Pump Engineering, recently went
through a successful round of private
funding.
