Expanding Desalination Frontiers Boosts Prospects, Yet Analysts Predict A Challenging Revenue Tide

Key Takeaways

• Expansion through new desalination plants and acquisitions in water-stressed areas enhances long-term revenue, market presence, and competitive edge.
  
• Strategic settlements and investments in water treatment technologies improve financial stability, open new revenue streams, and contribute to shareholder value.
  
• Dependence on uncontrollable factors like weather and geopolitical risks, alongside project execution in new markets, poses significant threats to profitability and growth.

Catalysts

Designs, constructs, manages, and operates water production and water treatment plants primarily in the Cayman Islands, the Bahamas, and the United States.

• The completion of new desalination plants and long-term operations and maintenance contracts, particularly the project in Honolulu and the expansion in the Bahamas, indicates an increase in long-term recurring revenue, enhancing future cash flows and profitability.
  
• Expansion efforts in water-stressed regions, including the recent acquisition of REC in Colorado and developments in Bahamas and Hawaii, are set to bolster the company’s market presence and competitive edge, likely driving revenue growth and diversification.
  
• The settlement with the Mexican government resulting in net proceeds adds to a robust balance sheet, offering the company flexibility for future investments, acquisitions, and capital expenditures, positively impacting financial stability and growth prospects.
  
• Investments in innovative water treatment and desalination technologies, including the joint venture for high-pressure reverse osmosis equipment, are expected to open new revenue streams and improve margins by catering to the industrial segment and lithium mining operations.
  
• Strong cash and working capital position following the settlement with the Mexican government, enabling further investments in capital-intensive projects and potential dividend payouts, contributing to shareholder value and attracting investor interest.

Assumptions

• Analysts are assuming Consolidated Water's revenue will decrease by -11.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.2% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $14.3 million (and earnings per share of $0.98) by about September 2027, down from $30.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 50.5x on those 2027 earnings, up from 13.8x today. This future PE is greater than the current PE for the US Water Utilities industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The decrease in construction-related revenue could signal risks to future earnings, especially if new projects do not commence as planned, impacting net margins.
  
• Dependence on weather conditions for increased retail segment revenues suggests a variable and potentially unstable revenue stream, which could affect profitability.
  
• The retail segment's success is tightly linked to factors such as population growth and rainfall patterns that are beyond the company's control, posing risks to consistent revenue growth.
  
• Risks associated with executing large-scale projects in new markets, such as the desalination plant in Honolulu, Hawaii, could lead to unexpected costs or delays, impacting earnings and net income.
  
• International operations, like the new project in the Bahamas and settlement with the Mexican government, introduce geopolitical and regulatory risks, which could influence financial stability and operational efficiency.

Valuation

• The analysts have a consensus price target of $38.0 for Consolidated Water based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $123.2 million, earnings will come to $14.3 million, and it would be trading on a PE ratio of 50.5x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $26.31, the analyst's price target of $38.0 is 30.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.