IPO Analysis: Basin Water (BWTR)


Story: Basin Water provides turn-key (or near so) ground water purification systems for cleaning up contaminated wells or otherwise getting a water supply to a desired contaminant level. They use ion-exchange resins, a well established technology. Old industry = lots of competition and commodity prices. My main question - what is there to possibly be excited about over water purification. Desalination, maybe, but trace impurity removal? Boring. But then again, these guys are bothering to try and come public, so maybe they have something. Or maybe not.

They claim a bunch of patent protections for removal of key trendy contaminants - arsenic (well, that one's not trendy), nitrate, perchlorate, chromium VI, and uranium. I have not read their patents, but there is no way they can be broad enough for industry dominance, as this is very standard chemistry and chemical engineering. So the patents are likely for some specific feature that could be worked around by a competitor. The patents are not their moat.

On the other hand, their modular system design approach and easy servicing sounds like a good product, so I'm betting that design and execution are their real moats, and with that, pricing. Let's see what the market says.

Company: Hmmmm. I'm getting sort of interested, until I hit page 2 of their prospectus, where they show FY 2005 $12.2M revenue and $0.6M net income, versus $4.3M revenue and -$0.6M net income for 2004. So far, tiny, but good, especially when they indicate that they closed 2005 with a $77.0M revenue backlog. Looks like they just got profitable and are ramping up quickly, but then, this: they closed 2004 with a $35.0M revenue backlog.

Now wait a minute. They talk about how, after water testing, they can set up their systems in a matter of days to weeks. They started 2005 with $35M in orders, but over the course of the entire year they only realized $12M in revenue? Where did the other <2/3's of the orders go?

Later (page 10) they make it clear that their contracts have a typical life of 5 years or more, so of that $77M backlog, only ca. $49M ($77M-$35Mx4/5) of it is new, and they may only see $10M ($49Mx1/5) in 2006. The problem now is that there is no possible way that I can make any reliable projections about their prospects that make them seem compelling, and they are currently too small to be of interest (they could easily be squashed by a bigger player, although they aspire to be the biggest).

Unrateable. Pass.