ECT 33.3% 0.2¢ environmental clean technologies limited.

growth stocks of the week.

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    GrowthStocks Stock of the Week Issue Date 19-May-2003
    Back Issues
    ESI tests the water

    Share Price $0.240
    Market Cap $18.50m
    12 Month Range $0.210 - $0.520
    Fundamental Risk 4.0
    Share Price Risk 4.5

    * Price correct at close of trade on 20/May/2003

    Profit warnings and a disappointing European response to Enersludge matter less than ESI's looming profit recovery. SPECULATIVE BUY.

    Australian city slickers take clean drinking water for granted. But the clear, cool liquid that emerges from city taps is a wonder of modern technology.

    The rain has often fallen many kilometres away. It's then collected in huge dams, treated, and delivered along a vast network of ageing pipes to your kitchen. Even so, if you have ever travelled overseas you will know our water looks and tastes better than most.

    Those in the bush are less fortunate. Ongoing droughts and water quality are major issues. And disposing of sewage and other waste water, whether in city or country areas, is something few of us care to think about.

    We'd rather leave that to companies which do want to think about it. Environmental Solutions International (ESI for short) is one of them - it designs and constructs plants to treat and dispose of wastewater. ESI's expertise and leadership in its field means it has recently entered the market for treating drinking water, too.

    But while ESI has been profitable in recent years, 2003 has not been easy. There are two main reasons. First, winning contracts and building treatment plants has taken time and involved extra costs in making tenders.

    These costs mean ESI has downgraded profit expectations several times this year. It now expects to record a loss exceeding $2.0m.

    But ESI's investment has already paid off. The company has won numerous water and wastewater treatment contracts this year and should commence the 2004 financial year with a record order book of $50m. In other words, ESI should return to profit in 2004.

    There's also a second reason for the 2003 downturn. ESI wants to make its mark in the 'green energy' industry, a sharemarket sector which has been out of favour since early 2002. Its product is a sewage treatment process with the somewhat unattractive name of Enersludge.

    An Enersludge plant is already treating sewage successfully in Western Australia. ESI has been marketing the process in Europe but the response so far has been disappointing. This year extra costs have been incurred in refocusing the marketing effort. To that end, ESI will meet with US and Japanese companies in coming months to promote Enersludge.

    The profit downgrades and Enersludge delays mean the stock has slumped 32% since GTS 51/Oct 02 (Hold for the Upside - $0.34). But now directors have started buying - they realise ESI is cheap.

    ESI holds cash of nine cents per share and is debt free. The company is a leader in the growing water management industry, which has enormous long-term potential. A turnaround in profit in 2004 seems highly likely.

    Of course, the risks with contract based businesses such as this are high. Delays and competition from large international competitors are commonplace. And while Enersludge is already a commercial product, ESI is encountering the usual marketing problems.

    But the valuation speaks for itself. This is a high growth company trading at less than one times sales and a low historical PER. You also get the potential from Enersludge thrown in for free at current levels. Clearly ESI is a higher risk company for the long-term but the valuation is too good to ignore. Expect some volatility but the stock is a SPECULATIVE BUY.
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