Jenny Ruth: Water firm's profits just keep flowing

Just Water International is one of those companies that managed its float beautifully, leaving little to chance.

While its prospectus provided extensive historical financial information going back to the year ended June 1999, including both actual results and what the results would have looked like if all its businesses had been part of the group over that period, it left little to chance with its forecasts.

The chairman's letter was signed on May 7, the shares started trading on June 15 and the forecasts only covered the period to the end of June.

By the time they signed off on the prospectus, the directors would have been fairly sure of how the company would finish its financial year.

In the event, it slightly bettered its forecasts: sales came in at $13.2 million compared with the $12.8 million forecast while trading profits (earnings before interest, tax, depreciation and amortisation) came in at $4.5 million, 8.1 per cent ahead of the $4.1 million forecast.

The company probably also got a little more than its fair share of publicity during the float because it was the first such capital raising on the stock exchange's secondary NZAX market.

Although Just Water already met all the criteria to join the main board, founder and managing director Tony Falkenstein says his advisers convinced him it was better to be a big fish in a small pond.

He denies a charge that the directors were conservative when making the forecasts, although he does say: "We wanted to make sure we had it in the bank."

Publicity around the float was one of the main reasons Just Water bettered the forecasts, boosting sales. Sales in June were the company's best for that month, Falkenstein says. As you might expect, the company's sales are reasonably seasonal with February tending to be its biggest sales month.

Just Water's shares have also consistently traded at a premium to the 50 cents issue price. They were trading at 88 cents yesterday.

So it's intriguing to find Falkenstein assuring his new shareholders at the annual meeting in November that he's sure the company will make mistakes. That's an attitude his staff say permeates the company.

"Coming from a private entrepreneurial company, I just want to reinforce that we won't always get it right. That's the cost of getting high growth. You have to try things," he says.

He hastens to add that he's also promised that he won't ever "bet" the company on any risks.

"We have tried to do some things in the past that haven't been that good, that haven't worked, but if you keep on doing the same thing you will keep getting the same results."

Certainly, the historical information in the prospectus shows the company has a track record of achieving growth. Sales have grown from $8.2 million in the year ended June 1999.

The $8.25 million raised in the float was used to repay debt taken on in April when it bought the Aqua-Cool business for $6 million and to position the company for further acquisitions.

Falkenstein says he hasn't made much progress on the latter goal since the float. Although he's looked at at least a dozen potential acquisitions, none has proved a good fit.

"We would have to see them being profitable units, if not now then in the future. We're certainly not going to buy something for the sake of it."

One of the places he's been looking is in Australia but says because of the "discount mentality" in that market it's been hard to find an opportunity apart from what he and a former Just Water employee are already doing.

Falkenstein's private company, Red Eagle, owns 47.7 per cent of Just Water Victoria with the former employee owning the rest. Just Water International has an option to buy Falkenstein's stake in the business at any time.

The prospectus says the Victorian business has been slower to develop than initially envisaged. It has been operating since October 2001 but has yet to return a profit.

Falkenstein says he still thinks the concept will work in the long run. About 90 per cent of water coolers in Australia use bottled water deliveries rather than being hooked up to the mains water supply, the opposite of the situation in New Zealand.

But a number of problems come with dealing with bottles including the hassle of changing them and associated occupational safety issues and security issues, particularly because of terrorism concerns.

Bottles can be contaminated and have been - usually as a practical joke - and the need for deliveries mean truck drivers visiting companies' premises, Falkenstein says.

A cooler hooked up to the mains water supply eliminates all these problems and is cheaper to boot, which ought to appeal to bargain-conscious Aussies.

But it takes a long time to change ingrained habits, he says. And water coolers are usually low down on a company's priority list.

Just Water doesn't operate in the retail bottled water market, but Falkenstein doesn't rule that out as a possibility.

"It's probably something that we could do along with an acquisition. We've now got a very good bottling plant and we've certainly got some excess capacity."

It isn't only the forecasts that were conservative.

The company's main business is supplying companies with water coolers and filters, some of which are hooked up to the mains water supply and some with replaceable tanks that the company services. It is also developing a small sideline of bottling water and branding the bottles with the customer's logo, providing them with an inexpensive form of image building.

Most of its contracts with customers run for three years and the prospectus says it has a very low rate of non-renewals. Yet rather than spread the costs of acquiring new customers over the life of the contracts, the company books all its expenses up front.

The company is honest in warning that if it has a good year, it could incur significant costs, even in excess of its income that year.

Falkenstein says this policy makes the company's accounts very easy to understand since reported profit is essentially cashflow less depreciation and amortisation.

That isn't the only element of conservative accounting: the company writes off its coolers over five years for tax purposes but they can last between 12 and 15 years.

One concern an investor might have is the company's succession planning, especially as Falkenstein is 57. But he says: "I'm not a retiring type."

In the meantime, he comes pretty cheap: the annual report shows his salary is just $60,000 a year.

"I've got the same interests as shareholders, which is to increase shareholder value. I do get a dividend, I hope." Falkenstein retained 75 per cent of the company in the float, although he did give $3 million worth of them to share between Onehunga High's business school, Auckland University's business school and the Unitec school of business management.

All the money raised in the float went to the company, not to Falkenstein.

The prospectus says Red Eagle doesn't intend to sell more than 5 per cent of its shareholding in each of 2005 and 2006.

Just Water International

Headquarters: 70 Shortland St, Auckland.

Profile

Founded in 1989, its main line is supplying businesses with water coolers and filters, some hooked up to the mains water supply and some with replaceable tanks that the company services.

It is developing a small sideline of bottling water and branding the bottles with the customer's logo, providing an inexpensive way of image-building.

Key financial statistics

Sales last year were $13.2 million, up from $9.7 million the previous year and up from the $12.8 million prospectus forecast.

Profit before tax was just under $3 million, compared with $2.5 million the previous year and the $2.8 million prospectus forecast. The bottom line after payment of $1.6 million in dividends was a $571,000 profit, compared with the $536,000 prospectus forecast.

Employees

Staff: 181

Key executives: managing director and founder Tony Falkenstein, Just Water NZ general manager Michael Fann, finance manager Martlon Bridge and Aqua-Cool general manager Raj Chaudhary.