Kelda Showers Limited Investment Review - Q1 2018

Status Update

• Following successful trials with Pure Gym, Kelda had budgeted for a rapid sales expansion into the wider gym sector, including exports to Bioritmo in Brazil, which had shown serious interest. The plan also anticipated early interest from less high usage leisure and hotel sectors. So far this has not materialised, for three reasons:
  • Price: whilst a retail price of c.£600-£700 yielded an acceptable RoI for very high usage budget gyms, it is not competitive elsewhere. And whilst other budget gyms groups continue with their own trials, each wants to independently verify savings before committing to a wider roll out. In Bioritmo’s case the problem was compounded by the heavy import duty.
  • Limited Range: the launch product was configured to Pure Gym’s requirements. Other gyms and other sectors have identified features and variants which Kelda cannot yet supply.
  • Quality Issues: some gyms experienced quality issues with early trial units. Root causes ranged from design, installation and assembly flaws. All root causes have been identified and resolved, and there have been no material new problems for several months, but, understandably, some potential clients have prolonged their trial periods.
• In response to these issues, management have instigated a number of product development projects, with the aim of significantly reducing the cost of manufacture, broadening the product range (directional showerhead and riser rail system are key requirements for many end users) and extending installation options (void and in shower fitment). The projects all anticipate extended testing, incorporating lessons learned from earlier quality problems. These projects are all advanced and the Company envisages being in a much larger addressable market with the new range, at more affordable retail prices in Q3.
• In the meantime, sales efforts continue in the budget gym sector, with four UK chains trialling current units.
• International business development has focused on water poor markets. Virgin South Africa begins a trial in March/April, and the South African government has opened enquiries relating to a very large potential order. Property groups in Singapore and a Malaysia University also committed to trials. A sales mission is being developed for April into California in conjunction with Innovate UK.
• The Company is also in advanced discussions with a major cruise ship operator, where the benefit is the reduced amount of water (fresh and grey), that the operator has to carry, and hence fewer stops/refuels the ship has to make. Initial trials have been successful and Kelda anticipates a significant order before the year end, subject to ship refit timing.

Investment Overview

Management Update

Noel Murray, the Company’s CTO, has resigned as a director and employee. He remains as a consultant to the Board and a supportive shareholder. The Company has recruited an experienced Head of Design to cover that element of Mr Murray’s role. Additional Production Engineering resource will be working closely with the new sub-contract manufacturer to be appointed following the quality issues set out above.

Cash Update

At the end of December the Company had a cash balance of £711k. The delay to revenues means that the Company will require further funding in Q2. Discussions are underway with several HNW individuals and funds with an interest in green investments, at similar valuations to the 24Haymarket investment. There are also two grant applications in process, with decisions due early Q2.
Funding discussions are for £1-£1.2m (depending on the level of likely grant income) at the same price paid by the 24Haymarket investors in June 2017. However, the Board is also considering a rights issue to cover the period through to the new product launches.

Exit Planning

It is still considered likely that both private equity and trade buyers could be potential acquirers once the potential is demonstrated. However, it is currently too early for any specific discussions.

Summary

Whilst the significant underperformance against plan, and the need for a further round of investment, are both disappointing, we believe the potential for this technology remains as strong. Unlike many “water saving” ideas, this one has now been proved both scientifically by Southampton University, and in a large scale commercial roll out with Pure Gyms. The Company now needs to execute against that potential.