Marine And Water For Energy Filtration Demand Will Drive Long Term Earnings Potential

Catalysts

About LiqTech International

LiqTech International develops and delivers silicon carbide based filtration systems that enable advanced water treatment across industrial, energy, marine and commercial pool applications.

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

• Accelerating adoption of high performance filtration in commercial pools, supported by record QlariFlow orders and a growing European pipeline, is expected to drive sustained water systems revenue growth and improve gross margins as higher volume absorbs fixed production costs.
• Expansion in the water for energy market in the U.S., supported by stricter environmental expectations around produced water and the new Texas service center, is positioned to convert pilot deployments into recurring system and service revenue that can lift overall earnings quality.
• Structural shifts in global shipping toward cleaner dual fuel engines and exhaust gas recirculation are creating a new marine filtration opportunity. Early orders through the China joint venture and lower cost assembly can support higher margins and incremental top line growth.
• Industry wide focus on resource efficiency and compliance in sectors such as steel, petrochemicals, lithium brine and plastics recycling is translating LiqTech’s successful pilot base into a growing cadence of large system deliveries. This should support revenue scale toward the 6 million dollar quarterly EBITDA breakeven level.
• Company wide modular system design and Chinese sourcing for components are structurally reducing unit costs and complexity. This is positioning LiqTech to expand into multiple applications while enhancing gross margin and narrowing the gap between contribution margin and reported earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming LiqTech International's revenue will grow by 22.0% annually over the next 3 years.
• Analysts are not forecasting that LiqTech International will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate LiqTech International's profit margin will increase from -53.3% to the average US Machinery industry of 9.4% in 3 years.
• If LiqTech International's profit margin were to converge on the industry average, you could expect earnings to reach $2.9 million (and earnings per share of $0.29) by about December 2028, up from $-8.9 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 18.8x on those 2028 earnings, up from -2.0x today. This future PE is lower than the current PE for the US Machinery industry at 26.2x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company still operates below its optimal scale, requiring quarterly revenue of approximately 6 million dollars to reach adjusted EBITDA breakeven. Any slowdown in order momentum across swimming pools, Water for Energy and marine could stall the path to scale and keep revenue growth below expectations, limiting the ability to reach positive earnings.
• Dependence on a few high growth verticals such as commercial pools, produced water treatment and marine dual fuel engines exposes LiqTech to cyclicality and regulatory or budget changes in these niches. A weaker long term capex cycle or slower regulatory enforcement could cap system deployments and compress revenue and gross margin expansion.
• The strategy to lower costs through modular designs and Chinese joint venture sourcing may face execution challenges or supply chain disruptions over time. This could erode the anticipated structural cost advantages and keep gross margins and contribution margins from converging meaningfully upward.
• Despite improving results, the business still posts a net loss. Any delay in converting pilots into repeat large system orders, or any mix shift away from higher margin Water Systems into lower margin product lines, could prolong losses and weaken net margins and overall earnings.

Valuation

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

• The analysts have a consensus price target of $4.2 for LiqTech International 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 $30.5 million, earnings will come to $2.9 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $1.85, the analyst price target of $4.2 is 56.0% 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.