Eco Investor August 2018

Pre-Dividend Securities

11 Year High For Phoslock

In late July shares in Phoslock Water Solutions, soon to be Phoslock Environmental Technologies, reached an 11 year high of 46.5 cents. This is close to their all time high of 49.5 cents in February 2007. The shares listed in August 2002 at 20 cents, and in 2015 they were just above 2 cents, so it has been a long effort and the company has worked hard for the shares to recover and now, for the second time, to more than double their original value.

The recovery over the past three years is due to progress in the company's commercialization strategy and its greatly improved revenue growth and prospects. In recent years the company moved to win larger contracts for its phoslock solution for water bodies with too much phosphate pollution and the blue-green algae it supports. This has begun to pay off through the move to China, taking on Chinese partners and staff, and expanding its Chinese factory.

China has a lot of water pollution and Phoslock is winning valuable work as part of the Chinese Government's commitment to clean the waterways. So much so that it has transformed the company from a single product supplier of phoslock to a multi product supplier of water engineering products and services. The products include zeolites, volcanic rock and bacteria. The services include mechanical and technical solutions and repairs for a range of water and water infrastructure problems.

This diversification is the rationale behind the proposed name change to Phoslock Environmental Technologies. Shareholders will vote on the name change this month, and the new ASX code will be PET.

Phoslock’s Beijing Canal Project - before (top) and seven months later.

Most importantly for the share price, the Chinese expansion has driven a big increase in sales and revenue. When the ASX queried the most recent share price rise, managing director Robert Schuitema reminded the ASX that the company had recently said it expected its 2017-18 sales to be between $15-17 million and profit before tax to be around $3 million. At year end the revenue number that came in for 2017-18 was $16.2 million, up 385 per cent.

He also said the company will enter 2018-19 with about $10-$12 million of work in hand solely from the Beijing Canal and Wetland projects and he expects "substantial additional projects both in China and Internationally to be forthcoming."

For 2018-19, revenue is expected to be in the range of $27 million to $30 million, up around 80 per cent. The forecast for net profit before tax is expected to be between $7 million to $10 million, up around 170 per cent.

To put these numbers in perspective, Phoslocks' 2016-17 revenue was $3.8 million and the loss both before and after tax was $1.8 million.

Investors love revenue growth and profitability, so it is not surprising that Phoslock's share price has taken off in the right direction.

Investors have been impressed and they "heavily oversubscribed" a $5.5 million placement in early July. The investors were Australian and overseas institutions and sophisticated investors. The issue price was 36 cents per share and the money is for working capital and expansion of the Chinese business including being able to bid on more and larger contracts.

China has a lot of waterways and cleaning them up looks like it has a long way to go. The same can also be said about the world. Over the years, Phoslock has cleaned-up over 300 lakes, dams, reservoirs, canals and wetlands around the world.

The question for investors is where to now for the share price? The placement investors seem confident of the near and mid-term future. And they are already ahead.

The company also seems confident it can continue the growth, both in China and the many other countries it operates in.

The capital raising and the company's story suggest Phoslock will be in growth mode for some time. But investors should keep the progress in perspective. A next step is for the company to start reporting clean, after tax profits. (ASX: PHK)