ASX RELEASE | De.mem Limited
De.mem Completes Strategic Acquisition in Victoria
1 April 2022: Australian-Singaporean water and waste-water treatment company De.mem Ltd (ASX DEM) "De.mem” or “the Company”
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is pleased to announce the completion of the acquisition of Stevco Seals & Pumps Victoria Pty Ltd, Epping, Victoria, Australia (“Stevco”
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De.mem had previously reported about the transaction in detail (see ASX release dated 22 March 2022, “De.mem Announces Strategic Acquisition in Victoria
Key Highlights
- Stevco brings an extensive, well-established industrial customer base in Victoria into De.mem group
- Substantial opportunity to cross-sell De.mem’s wide product range and advanced membrane technology
- Strong operational synergies with De.mem-Pumptech business in Tasmania
- Completion of De.mem group’s Australian-wide footprint with nationwide service & support capability
- Recurring revenue focus as large part of revenues generated from operations & maintenance services
- Profitable business with approx. $330,000 in normalized EBITDA per annum generated
- Accretive and well-priced acquisition
- Stevco founders will join De.mem management team
- Integration of Stevco will add further to De.mem’s move towards EBITDA break even
Stevco – Business Overview
Established in and operating since 2004, Stevco is a well-known supplier of pumps, small water treatment equipment and related operations & maintenance services to industrial and municipal clients in Victoria. Stevco has a reputation of supplying highest quality products and services.
Stevco’s long-term customer base includes leading industrial players from the food & beverage, agricultural and heavy industrial sectors, as well as a number of municipalities in Victoria.
The company generated approx. $2.3 million in annual revenues during the past 3 business years (on average) prior to the transaction. It generated approx. $330,000 in normalized EBITDA (adjusted for one-off items). Revenues are largely recurring and a significant percentage is generated from the rendering of operations & maintenance services.
Stevco is based and operates out of their workshop in Epping/Melbourne, Victoria, which will continue to serve asthe base for De.mem’s operations in Victoria.
Transaction Rationale
There is strong strategic rationale for the transaction, which is summarized as follows:
- Long-term customer base in Victoria: Stevco has a stable, long-term customer base of approx. 80 recurring clients in Victoria, which has been built since Stevco started operations in 2004. The customers are mainly from key industrial sectors such as food & beverage, agriculture and industrials/manufacturing, which is well alignedwith De.mem’s strategic focus of providing one-stop-shop water treatment solutions to an industrial customer base.
- Substantial cross-selling potential: Stevco’s long term customer base traditionally also requires larger water treatment equipment, services and chemicals. This creates substantial potential for cross-selling of De.mem’sadvanced membrane-based water treatment solutions and its specialty chemicals range.
- Strong operational synergies with the De.mem-Pumptech business in Tasmania: The Stevco business model of selling and servicing pumps and small water treatment equipment is perfectly compatible with De.mem’s activities in Tasmania, through its De.mem-Pumptech subsidiary. There are clear economies of scale, operational synergies and potential cost savings from the combination of the activities.
- National footprint and service capability in Australia completed: With the transaction, through Stevco, De.mem gains access to a workshop and service capability in Melbourne, Victoria. This completes the nationwide set up in Australia together with the existing facilities in Brisbane/Queensland, Launceston/Tasmania and Perth/Western Australia.
- Recurring Revenue Focus: Stevco’s revenues are largely recurring with a significant percentage generated from high-margin service & maintenance work. Hence, the transaction fits well into De.mem’s strategy of buildingits recurring revenue segments.
- Earnings Accretive and Well Priced: Stevco has been operating at approx. 40% gross margin (calculated as revenues less cost of goods sold, divided by revenues) and has consistently been generating positive EBITDA of approx. $330,000 per annum (normalized for one-off factors). The integration of Stevco will accelerate De.mem’smove towards sustainable, positive EBITDA. At approx. 4.5x EBITDA, the acquisition is well priced.
Key Step in De.mem’s Move towards Sustainable EBITDA Positive
As previously reported, De.mem recorded a substantially reduced Adjusted EBITDA loss of $-2.2 million in CY 2021, from $-3.1 million in CY 2020 (please see further details in the Company’s Annual Report dated 28 February 2022).
With the acquisition, De.mem adds a profitable business to the group, which opens up additional growth potential.The EBITDA and growth from Stevco will contribute significantly to the Company’s objective of achieving sustainableEBITDA and operating cash flow break even for the group.
Based on the new company structure, De.mem expects to achieve EBITDA break even at approx. $26 million in annual revenues (prior to the acquisition: $25 million).
Strong Acquisition Value-Add Track Record
The Stevco acquisition adds to De.mem’s outstanding acquisition value-add track record.
The Company acquired three businesses since 2019 – De.mem-Capic, Perth, Western Australia (acquired in April 2021), De.mem-Pumptech, Launceston, Tasmania (August 2019), and De.mem-Geutec GmbH, Velbert, Germany (October 2019). All three businesses achieved significant growth since their acquisition, despite the challenging business environment due to Covid-19.
This growth was driven in particular by the introduction of De.mem’s wider “one-stop shop” product range around its advanced membrane technology to the acquired companies’ customers and new sales team investment generatingsubstantial cross-sell and up-sell growth.
The individual entities performed as follows:
- De.mem-Capic generated approx. $3.5 million in revenue during the 9-month period since the acquisition on 1
April 2021 (average annual revenue pre-acquisition, over 12 months: $3.3 million);
- De.mem-Pumptech Pty Ltd (formerly known as Pumptech Tasmania Pty Ltd) recorded approx. $3.7 million in
revenue during 2021 (annual revenue pre-acquisition: $2.5 million);
- De.mem-Geutec GmbH recorded revenues of approx. $3.2 million in 2021 (annual revenue pre-acquisition: $1.8million).
Management Commentary
De.mem Chief Executive Officer Andreas Kroell said:
“We are delighted to welcome Stevco to the wider De.mem group.The Stevco acquisition completes our nationwide coverage of Australia through strategic locations in Brisbane, Perth, Launceston and now, Melbourne, as well as our nationwide service support capability.
Stevco brings a well- established client base in key target sectors such as the food & beverage segment to De.mem and opens up substantial opportunities for further cross-selling of our advanced product range, with our membranes and specialty chemicals in the focus.
"De.mem has built a track record of three highly successful, bolt-on acquisitions since 2019. All have achieved substantial growth. We believe that we are in an excellent position to make this transaction another great success, and look forward to working with the Stevco team, to take their business jointly to the next level.
With the enlarged group, our focus will now shift towards near-term, sustainable EBITDA break even.”
This release was authorized by the Company’s Chief Executive Officer, Mr. Andreas Kroell.
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