EU Water Regulations And Natural Treatment Solutions Will Drive Long-Term Upside Potential

Catalysts

About M Vest Water

M Vest Water develops and delivers natural chemical and filtration technologies for industrial water and wastewater treatment.

What are the underlying business or industry changes driving this perspective?

• Mandatory tightening of EU discharge regulations for salmon slaughterhouses between 2026 and 2030, combined with M Vest Water's first mover position and ambition to capture 70 percent of this market, should support recurring chemical volumes and top line growth as more plants are forced to install treatment.
• Global pressure to replace synthetic, microplastic based treatment agents with natural alternatives, in a market for water treatment chemicals projected at USD 50 billion with double digit growth for natural products, positions NORWAFLOC as a scarce, premium solution that can drive pricing power and improve gross margins.
• Successful completion of the long term METHA trial in Hamburg and subsequent long duration contracts in dredging and municipal sludge could validate the technology for replication across similar European sites, increasing contract backlog visibility and smoothing earnings through stable, multi year revenue streams.
• Commercialization of ongoing pilots in Middle East oil and gas, including paid trials in Oman and a large Saudi facility, can unlock high volume, produced water applications where even low dosage rates translate into substantial chemical demand, materially lifting revenues and operating leverage.
• Expansion of the offering to include dewatering and integrated sludge management solutions on top of chemicals and equipment creates a broader, system based value proposition that can increase wallet share per site, support higher EBITDA margins and raise the lifetime value of each customer.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming M Vest Water's revenue will grow by 70.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -87.7% today to 15.2% in 3 years time.
• Analysts expect earnings to reach NOK 18.0 million (and earnings per share of NOK 0.5) by about December 2028, up from NOK -21.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, up from -12.1x today. This future PE is greater than the current PE for the NO Chemicals industry at 23.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The ramp up of EU aquaculture regulations might progress more slowly than anticipated if enforcement, permitting processes or slaughterhouse investment decisions are delayed, which could postpone plant upgrades and materially slow growth in recurring chemical revenues from salmon slaughterhouses and related earnings improvement.
• Key pilot and qualification projects like the long term METHA trial in Germany and the Middle East oil and gas trials in Oman and Saudi Arabia may fail to convert into large scale, long duration contracts, which would limit scale in high volume applications and constrain revenue growth and operating margin expansion.
• Despite strong secular demand for natural water treatment solutions, M Vest Water operates from a small revenue base with negative EBITDA and cash flow, so any setback in converting the current tender pipeline could force further dilutive capital raises and weigh on net income and earnings per share.
• Capacity and execution constraints at the Bergen facility and outsourced German production, especially if multiple large contracts are won at once, could lead to delivery bottlenecks or higher than expected production costs, which would pressure gross margins and overall profitability.
• Increased competition from larger incumbents or new entrants in the fast growing natural chemicals segment, including other producers among the ten identified globally, could erode M Vest Water's pricing power and targeted 70 percent market share, which would weigh on long term revenue potential and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK11.5 for M Vest Water based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NOK118.5 million, earnings will come to NOK18.0 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of NOK7.2, the analyst price target of NOK11.5 is 37.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.