My Next SMN: Emefcy Group, A Multi-Billion Dollar Opportunity
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For those that have read my column with any regularity will know that I have repeated pushed and recommended one stock over the past 18-months – Structural Monitoring Systems (SMN). Is has been a great winner for readers and myself as the shares price has increased 500% over that period.
Regular readers will also know that as a proprietary trader, my team and I are not fund managers and therefore, cannot afford to buy and hold stocks for eternity. Our only source of income is the profits generated from our capital gains through buying and selling, so we cannot under any circumstance hold positions that are not performing. As a result SMN is the only stock I have held longer than 3 months, having first begun accumulating the stock in 2013.
This then leads me to my next point, as someone who needs stocks to actually move to make money (up or down) I have an inbuilt skepticism when companies visit us and promote themselves. Most sound great in theory but when the market is willing to reward the company (if ever) is an entirely different matter.
Of the several hundred companies that have visited our offices and promoted themselves, I have been genuinely impressed on all fronts only twice in three years. The first time I invited SMN to learn more and the second in May this year when Emefcy Group (EMC) presented. I told them too.
At the time EMC presented the share price was on a tear and aside from a small trade it was impossible to buy with any size. Furthermore, with the stock on such a strong run it was always vulnerable to a correction of sorts that inevitably produce a better buying opportunity when the initial hype subsides or even better a capital raising. We got both and I bought aggressively into the capital raising in July. With scale backs I didn’t obtain all the stock I wanted so I have been accumulating the stock post-raising at all different price levels – even paying as high at $0.83. With a current price of $0.75 readers can get a better fill than my worst one. For the record I am still buying more and I believe anything under a $1.00 is a unique buying opportunity that will not last. Just as I suggested on SMN below $0.65.
So why do I like EMC so much? Now I could go on for hours, so I will try to keep this a short and sweet as possible. The company is in the business of recycling waste water. They have a unique system that uses up to 90% less energy in recycling waste water than conventional methods and can produce these plants in volume. The plant size to treat an entire office building or small community is the size of a small bedroom so can easily fit in basements or tight places, removing the traditional need for large treatment plants across multiple acres. So they have the technology and can produce in volume. Tick.
Next, the market and the opportunity. EMC has had a working recycling plant in Israel treating a resort/golf course (from memory) with no issues or problems. They are currently building a treatment plant in Virgin Islands which will give them access to the US market. But the big kicker is China. By 2020 China has announced that 70% of all waste water must be treated compared with less 40% today. Moreover, much of this increase in treatment of waste water will occur in rural villages, communities and small towns where the capacity for traditional large treatment plants (like the ones General Electric build) does not exist. Small treatment plants are required. Another tick.
Furthermore, as thousands of these towns and villages begin to treat their water, the electricity demand will skyrocket. So low energy-consuming plants is ideal and this is where EMC has a specific advantage. Their plants can even be powered by solar energy such is the low relative electricity usage.
EMC has signed strategic partnership agreements for distribution and advisory to help its expansion into China. Their first sales distribution agreement for one province in China has the potential to generate $1 billion in revenue over five years. This is just one province. The ball is rolling.
Finally, the business model adopted by EMC is evolving as well. Traditionally they were looking to just sell these plants as a single contract sale item and move on to the next opportunity. They are now looking to follow the “software as a service” model in IT or SAAS by adopting “water as a service” – WAAS. By providing the plants free of charge (financed by an infrastructure fund) and then charging water rates the company will grow itself into a utility and not just a product manufacturer. This will allow EMC to have consistent, reliable and recurring earnings placing it on a significantly higher price/earnings multiple.
I was impressed heavily by management’s ability to identify the opportunity – be realistic about the risks- and how to mitigate them. They are not oblivious to the risks of dealing in China, specifically the theft of their intellectual property. They have been extremely successful before in producing multi-billion businesses so this is not their first rodeo. Even bigger tick.
The share price has been consolidating in the $1.00 to $0.65 zone as shown below. The current price action is building a sizeable platform from which an eventual upward break will occur and a new re-rating triggered. Catalysts will be further distribution and sales agreements and announcements to do with rolling out a WAAS business model. This is similar to how SMN also traded before its multiple series of rallies.
EMC is my next SMN. I see huge similarities in their market opportunities, positioning and my impressions of management. Like I have said before it takes a lot to impress me. EMC has managed that.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.