Gamble of the week: Innovative water cleaner

published 14 May 2012

According to the World Water Council, more than 1.1 billion people do not have access to safe drinking water, and more than a third lack adequate sanitation. China in particular is in terrible shape. Decades of industrial and biological pollution have contaminated almost 90% of the underground aquifers beneath its cities. The World Health Organization (WHO) estimates that 25% of the population do not have daily access to clean water, with 50% being forced to consume water below WHO standards.

One neat solution has been invented by Seattle-based HaloSource. It has created patented technology that can quickly purify water, and kill the deadly bacteria and viruses that cause disease. In April the company signed a landmark deal with Chinese firm Perfect Water Purification Manufacturing.

This is a major coup. Perfect is a $1.6bn supplier of consumer goods. And under the terms of the exclusive contract, it has agreed to purchase a minimum of 500,000 units annually, representing $4.5m of turnover for HaloSource. That compares to $12m for the whole of 2011. And this could just be the start.

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The Chinese market for devices that clean drinking water is estimated to be worth $2.5bn and growing at more than 20% a year. CEO Martin Coles said the deal "ties completely to our new strategy of building strong partnerships that are able to deploy successfully our technologies".

HaloSource (Aim: HALO)

Apart from China, Coles is also seeking to build new customer relationships in its other two main markets of America and India, as well as further expanding into developing countries. Indeed, in February HaloSource signed a $1m annual deal in Latin America with SIGSA. So, in the longer term, I think HaloSource can achieve profit on sales of $30m and $50m by 2016. On this basis, using a two times multiple and discounting back at 15%, I arrive at an intrinsic value of about 40p per share.

Liquidity can be poor for this stock, so bide your time if you wish to buy. And the board needs to achieve break-even without burning through its $13.4m cash cushion (as at December). That said, costs have been reduced, and assuming Coles can sign up a few more big customers, any extra funding would probably be available at more attractive levels than today. Three directors seem to agree as they recently hoovered up 342,000 shares.

House broker Liberum have a target price of 55p.

Rating: SPECULATIVE BUY at 27p (market capitalisation £20.5m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.