Movement is afoot within L.A. County for stormwater remediation. After meeting on October 4th-5th to discuss new stormwater regulations, L.A.'s Water Board moved one step closer to finalizing them last Thursday. As seen here, the Water Board posted its revisions to the various proposals on its website. Once these new set of protocols are finalized in November, L.A.'s 88 municipalities will be responsible for remediating not just trash and debris, but also a host of other contaminants. They will be forced to act quickly. This key development represents a significant catalyst for Abtech Holdings Inc. (ABHD.OB), setting the stage for the company's first set of stormwater municipal contract wins.
Hoping to understand what municipalities think of the new water quality permit requirements being promulgated in L.A. County, we came across this link in the Malibu Times. In it, Malibu's Mayor stated that the proposed requirements were too onerous for them. Even after spending tens of millions of dollars on water quality projects in the past few years, Malibu would still have a hard time immediately complying with these new sets of protocols.
While we cannot know for certain, it would seem as though Malibu's concerns are most likely shared by other municipalities in L.A. County and across the nation. With some already bankrupt and most other budgets already stretched thin, municipalities will be hard-pressed to handle these new stormwater regulations on their own.
Enter Abtech. In addition to being able to offer P3 financing through its partnership with Waste Management Inc. (WM), Abtech's turnkey solutions are extremely attractive to these municipalities for a number of reasons. First, Abtech's solutions will be contained in vault structures which are upgradeable. This means that additional solutions could be added to the vault structure as new regulations are passed in the future. So, not only can Abtech help the municipalities comply with these new regulations, but they will also be able to quickly modify their solutions in the future if it came to it. In addition, because Abtech's vault solutions can be inserted at the end of existing water pipes or at point of entry, these products will not only be easy to install, but also very easy to maintain. The potential for maintenance revenue for Waste Management is quite high under this business model - this was undoubtedly one of the main reasons why Waste Management partnered with Abtech 18 months ago.
In order to get these initial set of contracts finalized and approved, Abtech's proposals need to be approved by the respective city councils. These proposals are presented ahead of time in what is known as Letters of Intent to City Council. Before anything gets in front of the City Council, lawyers will thoroughly analyze various aspects to these Letters of Intent, making sure that whatever does get in front of the City Council has very sound footing to getting approved.
Although it is difficult to quantify what the company's eventual win-rate will be at these various City Council meetings, we believe that Abtech will initially be able to achieve a win-rate of 50%. Although we feel that the company's win-rate will improve over time, for now we feel that this is a reasonable starting point to use for modeling purposes.
With 70 current proposals in place around the country, if Abtech were to win half of these over the next twelve months this would equate to 35 contracts by the end of next September. Assuming the ASP for each contract is $500,000 per year and assuming that each contract is for three years, this means that Abtech should be able to build $50M+ in multi-year back-log by then.
After garnering its first set of contract wins and establishing a proof-of-concept, we expect Waste Management to aggressively market Abtech's offerings to hundreds of additional municipalities by the end of next year. With over 34,000 municipality customers around the country, let's examine what a 1% penetration of WM's customers could translate to for Abtech.
Assuming the company can garner another 100 contract wins by the end of 2014; achieving a 1% market penetration by the end of 2015 seems very reasonable. This equates to 340 municipal wins by then, or $500M+ in multi-year backlog, numbers that are not that high when one considers that there is an annualized $5 billion opportunity for the private sector to tap into for stormwater remediation.
Think about that. Over the next three years, Abtech can literally go from an unknown company to one with the potential for hundreds of millions in annualized revenue. With high margins and a recurring revenue stream to boot, Abtech should become both a potential take-out target and also a name that becomes warmly embraced by the Street.
That is not to say that it will be a consistently smooth ride. Like most companies this year, Abtech has already experienced some bumps in the road. We feel that management could have done a better job at understanding the elongated process required to break into the municipality sector and at communicating this process with investors. While most investors currently in the name have a long-term horizon because of the company's vast potential within both the stormwater and fracking verticals, a number of investors with a shorter-term perspective will not be as forgiving should the company not close on at least 3-4 municipality wins by year-end.
Nonetheless, with movement afoot in L.A. County, we feel that the odds are very high that the company will finally close on its first set of municipality wins next month. This should gradually translate into a smoother and quicker sales cycle for the company.
While investors should certainly be mindful that Abtech is a stock that carries financing risk and liquidity risk and one that should only be bought by investors with a tolerance for risks associated with micro-cap companies, Abtech's stock has multi-bagger potential from current levels. It remains one of our top picks as we head into 2013.
Additional disclosure: Primary ticker should be ABHD.OB. Thanks!