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ESI--in this weeks SHARES WEEKLY

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    Issue Date: 09 Nov 2002

    The Fundamentalist
    ESI's healthy opportunity in being green
    Tim Knapton



    The past two or three years have seen a number of major fiscal and regulatory stances in the OECD to help stem environmental destruction through poor methods of waste disposal. Failure to arrest the problem at its source creates a growing onus on the taxpayer, and recycling initiatives are now much more seriously occupying central and local government planning in Australia, the US, the UK and Germany.

    It is expected that more than £1.5 billion ($A4.17 billion) will be expended on purification of waste and stormwater flows by privatised water authorities in the UK over the next five years. The US Environmental Protection Authority, meanwhile, has estimated that more than $US300 billion ($A532 billion) will ultimately need to be allocated to preventing sewage discharge problems and improving disposal of solid and liquid waste.

    The US Department of Commerce has estimated that the global environmental market will aggregate to about $US8 billion this year. Australian remediation and recycling solutions are estimated to amount to about 5 per cent of that, expanding at 10-15 per cent per annum. In that context, it's somewhat surprising to observe the steady share price decline of Perth-based water and wastewater treatment specialist Environmental Solutions International (ESI). The stock has recently slipped below 30 cents from a high of almost three times that early last year.

    The company has invested tens of millions over the last decade on developing and commercialising its Enersludge process of treating sludge waste. Last year, its first commercial plant at Subiaco (Western Australia) was delivered to the Perth Water Authority and others have been rolled out at Woodman Point and Kemerton (both WA), Sunset Strip (NSW), Mount Beauty (Victoria), Kinoya (Fiji) and Manila (Philippines). Last month, a $4 million water treatment plant was contracted to supply Longford (Tasmania), which means that there will soon be installations in four Australian states.

    Environmental Solutions
    Price 25 cents
    Market cap $19.3 million
    Year to June 2002 (act.) 2003 (est.) 2004 (est.)
    Gross revenue ($m) 21.9 23.0 28.8
    Net profit ($m) 0.9 1.2 1.8
    EPS* (cents) 1.3 1.7 2.5
    PER 19.1 14.8 10.1
    DPS (cents) 0.0 0.0 1.0
    Yield (%) 0.0 0.0 4.0
    Franking (%) 100
    *adjusted for goodwill amortisation, notionally fully taxed
    The international marketplace is huge, but ESI has prudently chosen to attack it largely through distributor relationships. In that regard, a promising licence agreement for France has been signed with ONDEO-Degremont, the world's leading wastewater management organisation. A joint tender has been submitted for a major plant in Paris and the partners are targeting a number of other large municipal authorities.

    Enersludge reduces water content in sewage sludge to 25 per cent and then incinerates it at 450 degrees, which generates combustion heat, inert ash and bio oil. Combustion heat is used to heat inflow sewage sludge, bio oil is used to generate energy and ash is used to make bricks. A patent covers a technology abbreviated as Hybractor for using bacteria to digest water pollutants.

    In Queensland, the company has won a contract to design and construct three plants in the Daintree to deploy ultra- and nano-membrane filtration to produce drinking water. A technology strand for the treatment of winery waste fluid treatment plants has been legitimised by a contract from Evans & Tate's Margaret river winery.

    The key advantages of the Enersludge technology suite are its robustness and flexibility and the ability to develop new market verticals - such as tanneries and wineries - is attractive.

    Last year, the group's profitability fell by 22 per cent on a 7 per cent rise in sales, and cashflows were negative. That has caused significant damage to sentiment. However, given the pervasive moves in many European jurisdictions to ban landfilling of waste, there is a fair degree of contractual potential in the future and the company has at least remained in the black, unlike so many of its peers. What's more, the current equity capitalisation is now more than 40 per cent cash-backed.
 
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