Pure Technologies ( Toronto - PUR ) -- Water Tight

Pure Technologies (PUR.to $7.00) is the leading provider of inspection and monitoring services for water utilities to identify and repair leaks in a cost efficient manner.  Traditional methods are imprecise and often require large sections of pipe to be replaced.  Pure's systems zero in on problem areas, allowing remediation to be performed more inexpensively.  To date the company has focused largely on large diameter pipelines made from prestressed concrete.  Those are steel cylinders wrapped in heavy wire, and then coated with concrete both on the interior and exterior.  Problems occur when the wires begin snapping.  Pure supplies a variety of acoustic technologies that identify where those breaks are occurring, allowing repairs to be made at that specific location.  Prestressed concrete trunk lines (water delivery and waste water) account for approximately 3% of the installed base of water pipes.

Last fall Pure expanded its addressable market 20x by introducing technologies aimed at metallic pipes.  The same basic approach was applied to the problem.  Several types of instruments with fiber optic communication lines or radio transmitters monitor the pipes, creating a data baseline.  When anomalies are picked up more testing is sent to the area to clarify the problem.  Metal pipes have different characteristics.  They also are more complicated than the large trunk pipelines, requiring listening devices that are more maneuverable and less likely to get stuck.  The pipe's diameters are smaller, there are more twists and turns, and numerous valves and other obstacles stick out along the way.  Orders already have responded to the new metallic pipe technologies.  Existing customers are expanding adoption.  New customers are signing up.

Recurring revenues now account for a majority of Pure's business.  Sales of equipment represents approximately 33% of sales.  Those are the listening devices that water utilities employ to watch their systems.  Most of the rest is generated by consulting, inspection, and monitoring services.  Service income has been advancing sharply in North America.  A contract with the Libyan government has masked that improvement, though.  The company had a substantial contract in Libya prior to Colonel Gaddafi's overthrow.  That relationship stopped in its tracks after the revolution, mainly due to a lack of funds.  The project -- bringing water from a desert oasis to the cities -- remains operational, albeit at inefficient levels.  The company collected a large receivable in 2012, throwing off year to year comparisons.  New business remains at a standstill, though.  Pure is optimistic a revival will occur some day in the future.

Meantime, demand is accelerating.  In addition to water Pure generates about 5% of revenue from oil and natural gas pipelines.  That figure likely doubled in 2013 and could expand further in the year ahead.  Several new customers recently were added in the North American water utility market, moreover.  Competition is provided mainly by large engineering contractors which typically replace large sections of pipe when problems are discovered.  Pure's systems offer a more affordable alternative.  Cash strapped agencies are becoming increasing receptive to the company's targeted approach.  Expansion into the metallic pipe area is providing additional leverage.  Technical employees are being added at a fast pace to support the build up in demand.  New products are slated for introduction this summer.  Details have not be revealed.  But important new features are likely to be added to existing hardware platforms, allowing customers to upgrade without disruption.

International markets are coming to life.  Pure has started working with several Far East utilities.  A new software platform has been developed to facilitate that effort, helping the company coordinate its consulting efforts more efficiently.  Pure also is beginning to pursue smaller North American utilities.  The same software platform ("PureNet") is expected to provide lower cost design and monitoring services to those users, as well.

December period results likely were solid.  Performance tends to decline sequentially because water demand is high in the period.  Maintenance efforts often are pushed back unless essential.  For the year we estimate income rose 20% to $.12 a share, despite the Libya setback.  Sales likely increased 8% to $63 million.

In 2014 the Libya distortion will be eliminated.  We estimate earnings will improve 67%-100% to $.20-$.24 a share.  Sales could reach $80-$85 million, up 27%-35%.  Further margin expansion is possible in subsequent years as recurring revenues accumulate and sales in general are spread over a less rapidly rising base of overhead costs.  Acquisitions of complementary technologies could yield additional leverage.  The initiation of a cash dividend is possible.

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