IPO VIEW-Can a water stock weather the IPO dry spell?
NEW YORK, April 11 (Reuters) - Energy Recovery Inc, a water purification equipment maker, has filed to go public, and the issue could see solid demand since it gives certain niche investors a new asset to chase and the company looks insulated from an economic downturn.
Energy Recovery earns almost all its money from valves used in a desalination process, so its performance is directly tied to the growth of desalination plants worldwide, whether its for high-technology manufacturing, agriculture or drinking water.
The emergence of many clean-energy and water-focused funds in the past few years also bodes well for a stock that would be a targeted water play like Energy Recovery.
"Water funds have a lot of money and a limited amount of stock to own," said Christopher Glynn, an analyst at Oppenheimer & Co Inc. "They'll be all over this thing."
Reverse osmosis makes salt water potable by blasting it through a big filter, and the company's valves can cut the cost of the process by nearly a quarter, said Tom Pankratz, a desalination consultant and editor of the Water Desalination Report.
The blasting in the reverse osmosis process requires a lot of energy, and as the company's name suggests, Energy Recovery valves help corral energy back into the desalination cycle.
The company reported 2007 net income of $5.8 million, up 143 percent from about $2.4 million in 2006. Energy Recovery is looking to raise up to $175 million for working capital and potential purchases of businesses, products and technologies.
The company will list shares under the symbol ERII on the Nasdaq exchange, but no time frame for listing has been set.
Cascal NV (HOO.N), a UK-based water and utility company that hit the New York Stock Exchange on Jan. 28, has performed relatively well in a tough market. The initial public offering was priced at $12, the low end of its price range, after terms were revised and the company offered 12 million shares instead of the intended 16.7 million. The stock, however, has risen 4 percent since, while the broader market is down 1.5 percent.
In addition, German utility RWE (RWEG.DE), which suspended the IPO of its American Water division in November because of poor market conditions, reinstated the offering on March 31 and plans to issue 64 million shares at $24 to $26 per share.
REVERSE OSMOSIS GROWTH
There are about 13,100 reverse osmosis plants around the globe, and through 2015, the capacity of the plants is forecast to grow by about 8 percent a year, according to Pankratz.
An economic slowdown would not likely stifle demand for fresh water. Industrial use accounts for some 45 percent of the fresh water consumed in the United States, according to U.S. Geological Survey data. But only about 12 percent of that is used in manufacturing. The rest is used by the electric power industry, which tends to be fairly stable during a recession.
Among manufacturers, producers of semiconductor, electric components, and pharmaceuticals are the top users of ultra-pure water. Soda and beer companies also require filtered water to ensure consistency of flavor everywhere, said David Kurzman, head of clean technology at research firm Panel Intelligence.
Even if a slowdown occurs, water is vital and irreplaceable in manufacturing and the effect on demand may not be severe.
"There could be a slight reduced need for ultra-pure water, but it is one of the first things to come back after a recession," Kurzman said.
There is also a long-term growth opportunity in providing safe drinking water worldwide. Currently 1.1 billion people do not have access to reliable water, according to World Health Organization data. While it is just one method of providing clean water, reverse osmosis can be a viable solution for the Western United States, Australia and the Middle East, where fresh water is relatively scarce and sea water is plentiful.
Irrigation also creates strong demand for reverse osmosis plants in particular. Pankratz cites Saudi Arabia, Iran, and Spain as three nations that obtain more than 70 percent of all irrigation water from reverse osmosis plants.
With pure water demand likely to stay strong and energy prices high, its product should be all the more attractive.
"Any technology that can reduce energy usage on a large scale is going to save a huge amount of money and reduce the cost of water desalination," Kurzman said. (Editing by Braden Reddall)
