With concentrated initiatives to convert years of R&D into profitability, water tech company De.mem (ASX: DEM) finally has that in site, an inflection into the green that will be accelerated by their expansion in Victoria through the neat acquisition.
Although the majority of De.mem’s water treatment products have been developed for commercial applications, such as their turnkey water treatment systems that are deployed to mining sites, they have bolstered their cash flow with the acquisition of Stevco Seals & Pumps.
Based in Epping, Victoria, Stevco was first established in 2004 and is now a well-known supplier of pumps, small water treatment equipment and related operations & maintenance services. The business services both industrial and municipal clients in Victoria where revenue is largely recurring.
With the acquisition, Stevco will become De.mem’s base in Victoria with vendors Steve Russell and James Blannin to also enter into employment contracts with De.mem.
“The acquisition of Stevco Seals & Pumps Victoria Pty Ltd is another important milestone and completes our nationwide coverage of Australia through strategic locations in Brisbane, Perth, Launceston and now, Melbourne, as well as our nationwide service support capability,” said De.mem CEO, Andreas Kroell.
“De.mem has built a track record of three highly successful, bolt-on acquisitions since 2019. All have achieved substantial growth. We believe that we are in an excellent position to make this transaction another great success, and look forward to working with the Stevco team, to take their business jointly to the next level.”
Over the past three years, Stevco has averaged $2.3 million in annualised revenue, delivering approximately $330,000 in normalised EBITDA.
Total upfront consideration for the acquisition is $1.71m comprising $1.25m cash and $0.25m DEM shares for the business, and $0.18m cash and $0.3m DEM shares for inventory.
An additional $200,000 can be earned by the vendors if Stevco achieves at least $4m revenue in the 2 years with milestone payments along the way.
With their continued national expansion through this entry into Victoria, De.mem has its sights on profitability having substantially improved their financial performance over the past year.
For the 12 months ended 31 December 2021, De.mem reported a 28% increase in revenue to $18.1m. The increased sales contributed to a 29% improvement in their adjusted EBITDA loss to -$2.2m.
Based on the new company structure, De.mem expects to achieve EBITDA break even at approx. $26 million in annual revenues (prior to the acquisition: $25 million).
Alfred Chan is an Analyst at Emerald Financial, specialising in ASX-listed small cap companies.
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