Water purifier-to-dispenser specialist Waterlogic (WTL:AIM) is to make its Australian debut through the A$60 million (£38.5 million) cash acquisition of Cool Clear Water. The deal will improve the amount of recurring revenues in the group and enhance its profit margins. The market liked the announcement, sending the shares up 0.5% to 193.5p.

It is not yet a done deal. Waterlogic needs to secure debt financing to fund the acquisition and it is still in talks with banks to get the money. It reckons the deal should complete in June.

Cool Clear Water is the market leader in Australia for point-of-use (POU) purified water coolers. It has more than 26,000 units installed in offices and buildings across more than 11,000 different customers. It is mainly a rental business so Waterlogic will benefit from recurring income.

Waterlogic's tactic is to use Cool Clear Water's strong market position to introduce its own Firewall technology and develop a consumer-facing proposition in Australia. Firewall is Waterlogic's ultra-violet technology that purifies water from the main systems. Rather than use bottled water, customers merely connect their Waterlogic system to a normal water tap.

Chief executive officer Jeremy Ben-David told Shares that further 'bolt-on' acquisitions are likely in Australia and that talks are already underway with potential parties.

The £150 million cap last year suffered a profit warning after delays to contracts for the supply of water filtration machines to the consumer market. As we discussed in Shares two months ago (click here), the group started 2013 in a stronger position as several large customers prepared to launch marketing efforts to sell Waterlogic's products to consumers.

Full-year results on 15 April revealed that Waterlogic was in talks with several potential distribution partners including water treatment companies, white goods manufacturers and consumer product companies to increase the availability of its products to the consumer market.

Earlier this week (22 May), Waterlogic signed a Japanese distribution agreement and revealed that direct-to-consumer marketing efforts by a major customer, Indesit, had started in Russia and Turkey, with Italy to follow.

Stockbroker N+1 Singer initiated coverage on the stock on 22 April with a 235p price target. It says the share price should re-rate to a higher level as growth expectations for 2013 and 2014 'materialise'. It comments: 'Waterlogic has the hallmarks of a high growth company but with the revenue model that ensures predictable and ongoing income.'

N+1 Singer claims that point-of-use water solutions can be more than 3.5 times cheaper than bottled water alternatives and says the market is moving away from the latter model. 'The growth of the POU market has been fuelled by the success of Waterlogic; over this period the company's install(ed) base increase at a compound annual growth rate of 20%, compares to the total market which grew by 16%. We believe the trend presents a “land grab” opportunity for POU companies, especially Waterlogic given its market leading position.'

Issue Date: 24 May 2013