Water Purification Research Company in Bangladesh - PDF by fzh20470


Water Purification Research Company in Bangladesh document sample

More Info
									                                                                                                 Senior Analyst: Kipley J. Lytel, CFA
                                                                                                              Associate: Dan Lavric
                                                                                                                        May 9, 2005

                               HYDROFLO, Inc.: (OTC BB: HYRF.OB)
                                           Rating: Reaffirm Speculative Buy
                                            Price Target: Revised to $0.42

                                                            Share Statistics
                                 Symbol                                                  HYRF
                                 Current Price (5/6/05)                                   $0.29
                                 High/Low 52 weeks                                    $0.36 - $0.08
                                 Market Capitalization, mn.                               $10.6
                                 Shares outstanding, mn.                                   36.5
                                                    Source: Yahoo! Finance, SEC filings

Analyst summary
We reaffirm our Speculative BUY rating on HYRF but revise our price target to $0.42 from
$0.47, the net effect of the Company’s robust operational execution and the approximate two-
fold increase in shares outstanding, as of Match 31, 2005. We continue to be impressed by
HYRF’s recent developments in both water filtration and water treatment segments. Indeed,
the Company is executing with traction in a host of operational fronts, from augmenting the
business with another portfolio company, to pipeline headway in the water filtration
segment, along with distribution agreements. In a relatively short period of time, HYRF
signed commercial and distribution agreements, provided laboratory tests on its products
and expanded the management team in marketing and product management. As a result,
HYRF’s management succeeded to design the entire supply chain for water filtration
products, from production to marketing distribution. HydroFlo’s investment value in
controlled companies has increased 110% since June 30, 2004, while acquiring synergetic
technology through equity transactions.        Given HYRF’s unique service platform and
resources, we believe HYRF is on track to reach our price target.

We have revised our price target to reflect recent company developments and greater number of shares
outstanding on March 31, 2005. For the sake of a conservative approach, we have assumed the number of
shares to increase by 1 million each quarter. We used the industry multiples for Water Utilities industry and
applied a discount to industry multiples to account for HYRF’s risky projects, small cap and the characteristics
associated with the OTC BB. Given the fact that HYRF is a business development company, our valuation takes
into account both bottom financial results (P/E valuation) and estimated net market value of HYRF’s
investment (P/B valuation). We derived the price target by equally averaging the price-earnings and price-to-
book valuation methods.
Valuation & Price Target Calculation
Valuation & Price Target Calculation
Valuation                 Industry multiples    discount*     HYRF                                                          Price
method                      Water Utilities                  Multiple                                                      targets
P/E                              29.1              30%         20.4            x          EPS FY06             $0.03       $0.56

P/B                              2.8               30%          2.0            x   Net assets per share FY06   $0.14       $0.29

                                                                                   Average price target                    $0.42

*DISCOUNT: size of company, exchange, leadership position, small cap, volume
Source: Analyst estimates.

Recent Financials

A year-over-year analysis would be meaningless because HYRF changed its business model after March 3,
2004. However, on a quarter-over-quarter basis, HYRF’s management recognized $552,869 as net unrealized
gain on investment, and ended Q3FY05 with an EPS of $0.01 compared to $111,388 of net unrealized gain and
breakeven EPS in Q2FY04.

 HYRF Portfolio Companies as of March 31, 2005,
  Company*                                            %           Cost of           Fair Value as     %
                                                 Ownership      Investment      of March 31, 2005   Chg
 HydroFlo Water Treatment, Inc.                     100%          $2,266               $2,640       17%
 Metals & Arsenic Removal Technologies              100%           584                   865        48%
 Safety Scan Technologies, Inc.                     100%            718                  715         0%
 Total portfolio                                                  $3,567               $4,220       18%
 Source: SEC filings
 * not included: Ultra Choice Water, Inc. (UCW) established subsequently on April 12, 2005

Other investment considerations

   ♦ On May 2, 2005, MARTI signed a commercial agreement with Source One Fulfillment (SOF), pursuant
     to which SOF will package, warehouse and distribute all MARTI production. The commercial
     agreement relates to the entire range of MARTI product portfolio. Source One Fulfillment was selected
     as partner at the recommendation of Essentially Yours Industries Inc., one of HYRF’s distributors.

   ♦ On May 4, 2005, HYRF’s subsidiary Metals & Arsenic Removal Technology, Inc. (MARTI) signed a
     distribution agreement with Essentially Yours Industries, Inc. (EYI), a subsidiary of EYI Industries Inc.
     EYI will distribute HYRF’s FATS Units, Water Pitcher and Filter Units. EYI is expected to begin
     distribution of MARTI products in May 2005. EYI is an international distributor of dietary supplements
     and nutritional products and HYRF’s water filtration products fit their portfolio.

   ♦ During Q3FY05 HYRF continued to expand its management team, stressing on MARTI business. Thus,
     on April 27, 2005 HYRF added Paul Ogle to hold the position of Vice President of Consumer Products.
     Mr. Ogle will be responsible for managing sales and distribution of MARTI product lines in the
     Americas. Previously Mr. Ogle was a Business Development Manager in the International Trade
     Division of the North Carolina Department of Commerce. Mr. Ogle also held the position of Industry
     Marketing Manager, Europe & Asia region with the German ABB. Moreover, Mr. Ogle is a board
     member of the NC World Trade Association and this fact could be an asset in promoting MARTI
     products. Also in April 2005, HYRF announced the addition of Kathleen Tiller as Vice President of
     Marketing. Ms. Tiller will be responsible for marketing the MARTI product lines, especially managing
     participation at tradeshows, publications, as well as create and manage company advertisements. Ms.
     Tiller has over 20 years of experience, including executive positions.

   ♦ On March 31, 2005, HYRF received first order for ARTI-64 arsenic removal media from Kelly
     International. Currently we are unable to quantify the benefits from this order, however, Kelly
     International Ltd operates about 5000 non-electric foot-powered purification units and the agreement
     stipulates that HYRF will provide media for all these purification units. A distribution agreement with
     Kelly International was signed two weeks earlier on March 17, 2005 and stipulated distribution rights of
     MARTI’s arsenic removal processes and products to India, Bangladesh, Nepal, Indonesia, Thailand,
     Australia, western Africa and New Zealand. Kelly International Ltd. is a family-owned water treatment
     company with an experience of 15 years, conducting operations mainly in New Zealand market.

   ♦ March 29, 2005, Microbac Laboratories released the results of the laboratory tests confirming the
     bacterial removal ability of arsenic removal media ARTI-64. The testing provided significant reduction
     of bacteria from Coliform, E. coli, and Staphylococcus Aureus. Each type of bacteria was added to the
     sample and tested individually. The following table presents the filtration power on each component
     added into the sample. Shortly after announcing the test results, on April 3, 2005, HYRF decided to file
     a US patent for bacterial and viral control of liquid substances for ARTI-64(TM) technology.

         Test results reported by Environmental Chemist Inc.
                                                                     Arsenic   Copper     Zinc       pH
         1. Untreated Industrial Wastewater (ppm)*                    7.95     0.005     0.235      6.88
         2. After treatment with ARTI-64 (ppb)**                       0.6     0.007      0.018      6.8
         1/2 ratio                                                   13,250     714      13,056     n/m
         Source: Company’s press release
         *ppm - parts per million
         **ppb - parts per billion

   ♦ On March 24, 2005, HYRF’s portfolio company HydroFlo Water Treatment, Inc. announced that it had
     shipped a large Pressure Line Up Stream (PLUS) system to be installed into the new pipeline of
     Anderson County in South Carolina. The PLUS system involves utilization of latest natural oxygen
     technologies designed to prevent corrosion and control odor in wastewater systems. The system was
     purchased by Buckeye Construction of Canton and is expected to become operational in August 2005.

   ♦ On April 12, 2005, HYRF formed the Ultra Choice Water, Inc. (UCW). The company will provide water
     treatment systems to commercial and residential customers, especially water coolers without bottles for
     offices and individual consumers for a monthly fee.

         Price Performance: HYRF versus DJ US Water Index and S&P500, 1-year period

                                                 Source: BigCharts

Kipley J. Lytel, CFA, is a senior partner with money management firm Montecito Capital Management. For over three
years Mr. Lytel served as a lead securities analyst for M.L. Stern & Company. Previously, he performed portfolio
management and analyst coverage during his employment with two hedge funds, Pacific Strategic Fund Group and DD
Capital Management. His background has been marked by his experience as a Generalist, with analyst coverage spanning

numerous industries, including: telecommunications & wireless, health care, retail, consumer products, technology,
gaming and energy (E&P).

Mr. Lytel has over fifteen years of investment finance experience, with expertise in equity valuation, credit analysis,
private placements, and buy/sell recommendations. He received his Masters of Business Administration (MBA) from the
Peter F. Drucker School of Management at Claremont Graduate University, where he also received his undergraduate
Bachelors of Arts (BA) degree in Economics. Mr. Lytel holds the Chartered Financial Analyst® designation, is an active
member of CFA Institute and the Los Angeles Society of Financial Analysts (LASFA). He served as a grader/senior grader
in the CFA® Examination Grading Program for CFA Institute and has been a Regional Expert for CFA Institute's advisory
panel on investment management.

Spelman Research Associates, Ltd, is an independent fee based research, publishing and distribution firm whose
contract analyst adhere to the ethics and standards of CFA Institute. The views expressed in this research report reflect the
analyst’s personal views about the issuer and its securities. Opinions and recommendations contained in this report are
submitted solely for advisory and information purposes and are not intended as an offering or a solicitation to buy or sell
the securities mentioned above. The analysts are responsible only to the public and this report is not a service to the
company. We received a fee of $23,500 from the company for one year’s coverage. We do not inform any company in
advance of the nature or conclusions of our analysts’ reports in advance of paying the fee nor can a company withdraw
from coverage before the expiration of the one year term. Neither the Analysts nor the company own equity or debt
securities of the companies on which our contract analysts report.

More information about Spelman Research Associates, Ltd., 545 Madison Avenue, Suite 200, New York City, NY 10028
Phone: (212) 838 5520 Fax: (212) 838 5350 Web: www.spelmanresearch.com Email: info@spelmanresearch.com.


To top