Some 1.1 billion people have no access to safe drinking water, while 2.6 billion, or 40% of the world’s population, lack decent sanitation, according to the United Nations. With populations rising and droughts becoming more frequent due to climate change, the situation is getting worse. So it’s essential that we find an answer to this problem quickly. One part of the solution is recycling – cleaning dirty water and reusing it. And that’s where this week’s gamble, Amiad Filtration, has made its mark, competing against the likes of Siemens in the colossal $50bn-a-year water-treatment market.
Amiad Filtration (AIM:AFS)
Amiad’s cutting-edge filtration systems were initially developed 40 years ago to provide irrigation for Israeli kibbutz (community farms). But nowadays it exports these low-maintenance devices around the world for use within industry and agriculture. Last year, Amiad delivered 2008 sales of $73.3m, adjusted earnings per share of 27¢, and paid a 7.8¢ dividend that was comfortably 3.5 times covered. But at its current price, the stock trades on a historical p/e ratio of just 7.2, while also offering a decent 4% yield. So why is this established company so cheap?
It seems that shareholders fear that the low oil price may cause orders from farmers who grow corn and soybeans for ethanol and biodiesel to dry up. This would be a concern, however I suspect (although this is not disclosed) that biofuel producers only represent a small part of Amiad’s total sales.
Broader risks include greater industry competition, potential difficulty for customers to get financing in these conditions and company net debt of $6.8m. However, these points must be seen in the context of demand created by increased consumption, tougher regulation of water quality and better sewage control in the developing world, which should drive sales.
With 2009’s opening order book higher than last year, and governments everywhere planning to ramp up infrastructure investment, Amiad looks well placed to ride out the severest of storms. I estimate 2009 sales will be at least $70m, which should translate into an underlying EPS of circa 20¢ (or more). Thus I value the stock at around 165p a share, based on a through-cycle operating profit multiple of eight times, or 30% higher than today.
Recommendation: speculative BUY at 127p (market capitalisation £24m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments