Since 1991 Biorem (OTC:BIRMF) has been a designer and supplier of biological odor control systems. The technology Biorem employs was developed at the University of Waterloo. To date they have over 1200 systems installed worldwide. Biorem is capable of providing a complete suite of services from design, build, and implementation.
Biorem’s engineered biofilters that are much more effective and efficient than organic solutions like wood chips and compost. They have current installations that are now over 20 years old and have not needed any replacement nor significant maintenance. Biorem’s customers range from petrochemical companies to municipal waste treatment centres.
Biorem’s value opportunity
At the end of fiscal year 2010, a decade ago, Biorem had revenue of $17 million and an EDITDA loss of $2.5 million as they were at the time still heavily investing in sales and marketing plus research and development. The balance sheet was mostly clean, $800K in cash, $1.8 million in long term debt. Backlog was $12.1 million. Biorem closed 2010 with an enterprise value of $7.6 million.
At the end of fiscal year 2015, five years ago, Biorem had revenue of $16.9 million and EBITDA of $2.2 million. The balance sheet was still pretty clean with $2.7 million in cash and $2.9 million in long term debt. Backlog was $16.7 million. Biorem closed 2015 with an enterprise value of $9.9 million.
Now fast forward to today. Biorem has TTM revenue of $20.8 million and EBITDA of $1.1 million. The balance sheet is fully loaded with $9.4 million in cash and zero debt. Backlog is $35.4 million and its enterprise value is currently $6.8 million, it’s cheapest in over 6 years.
There is no doubt that investing in Biorem requires some patience. Their revenues can be lumpy and gross margins can fluctuate depending on the type of work they are doing and how competitive the bid process was. However, over the last 5 years there has been a consistent trend upwards both in terms of backlog and revenue recognition. Margins have generally remained the 22-26% range.
It finally appeared that Biorem was going to break out early this year with a flurry of new orders but then Covid-19 hit. Due to supply chain issues and project delays some orders have been pushed out into the last quarter of this year and into next year, As a result revenue recognition this year has diverged significantly from their backlog
Historically, Biorem’s annual revenues tend to mirror their backlog. For example their backlog entering 2019 was $21.8 million and 2019 revenue was $20.6 million. Looking out over the next 12 months, Biorem should be able to recognize at least $30 million of their backlog. At 22% gross margin this would lead to $6.6 million gross profit. At 26% margin it would lead to $7.8 million gross profit.
Operating expenses are pretty stable so any increase in gross margin will flow through to the bottom line. For operating expenses sales and marketing runs around $2 million annually and general and administrative at $2.6 million. So pre-tax income for the next 12 months should be in the range of $2 million to $3.2 million. Biorem’s market cap ex-cash is $5.6 million so we’re looking at an ex-cash P/E below 3 going forward. And this is for a company with zero debt.
The growth opportunity
With zero debt and a forward P/E ex-cash under 3, this may scream melting ice cube, but that could not be further from the truth. Taking a 3 year average for revenue to smooth out some of the lumpiness due to timing of contracts, Biorem’s revenue trajectory since 2015 has been:
- $15.7 million (2013-15 average)
- $14.5 million (2014-16 average)
- $18.5 million (2015-17 average)
- $20.9 million (2016-18 average)
- $22.5 million (2017-19 average)
Doing the same for end of year backlog the numbers are:
- $13.6 million (2013-15 average)
- $16.0 million (2014-16 average)
- $17.7 million (2015-17 average)
- $19.4 million (2016-18 average)
- $23.9 million (2017-19 average)
And right now the current backlog is $35.4 million, the highest it has been in Biorem’s history.
What has led the growth
1) There has definitely been a trend towards green initiatives and protecting the environment. Biorem’s odour control solutions not only prevent nasty smells from polluting our senses but they also prevent harmful gases (the cause of these odours) from being released into the nearby environs. Many of Biorem’s customers are city facilities and chemical facilities located in densely populated areas where prioritizing clean air is becoming more in vogue.
2) Much of Biorem’s sales and marketing spend in its early years was getting their foot in the door, trialing a system with a potentially large customer and proving that their solution was better than the alternatives. Miami Beach is a great case study where Biorem was awarded a contract in 2016 to provide odour control for a waste water pump station. Earlier this year Miami Beach needed to replace obsolete systems at three more pump stations. They gave Biorem an $850K contract to do the work as Biorem’s original system was working flawlessly and the city believed it would be best to standardize all the odour control systems in the city. They had so much confidence in Biorem’s capability that they passed a resolution to waive the formal competitive bidding process.
And the order flow just keeps coming as Biorem just announced last month that they received two more contracts from the city of Miami totalling $2.4 million.
Will the growth continue?
This is a resounding yes. I believe Biorem has hit an inflection point. Besides Miami, Biorem has also received in the last month follow on orders from the city of Montreal. They have proven to build long-lasting effective systems that require pretty much no maintenance once installed.
Large customers have shown they prefer dealing with a single company to fulfill their needs. This could ultimately lead to exponential growth. And the current environment (Biden winning presidency, increased infrastructure spending, the desire for green cities) is prime for this growth.
But there is also optionality for Biorem outside of North America. Currently the U.S. and Canada represent about 85% of Biorem’s sales. The remainder is mostly from China. In 2016 a subsidiary of TUS Holdings, a multi-billion dollar Chinese holding company, purchased Biorem’s convertible debentures from a VC fund. The debentures were converted into common shares giving the subsidiary of TUS a 65% stake in Biorem.
This was a strategic investment to introduce Biorem’s technology to China where the need for environmental controls is quite pressing. Since 2016 Biorem’s sales to China have been pretty spotty. But of note they did just secure $2.2 million in new orders last month including a follow on order with Sinopec. The potential is there and everything is aligned; I believe it’s just a matter of when the Chinese business takes off.
What will it take for an upsurge?
Revenue has historically been lumpy on a quarterly basis. Over the years it hasn’t been unusual for Biorem to release a few lacklustre quarters due to project delays or lower margins due to product mix and then follow it up with a monster quarter that essentially plays catch up. For example Q4 of 2018 had revenue of $10.9 million and EBITDA of $1.4 million compared to the previous 3 quarters of $13.4 million revenue and $0.4 million EBITDA.
It was a great year with $23.4 million revenue and $1.8 million EBITDA but for the first 3 quarters investors were disappointed. And after a monster 4th quarter the next few quarters were just going to look weak in comparison. I don’t know what the solution to this problem is. Biorem’s last quarter was on the weak side but they have already guided to a very strong 4th quarter. Of note Xebec Absorption has been suffering the same problems as Biorem this year with supply chain issues and on-site work and travel being compromised by Covid-19.
The stock is cheap. It is growing. Value + growth is extremely rare. And then it is also in the right space. Xebec has similar margins, 3x more revenue, 2.5x higher backlog, and yet a market cap of $638 million, or 42x that of Biorem’s. But everyone reading this knows of Xebec. Biorem’s public float is only about 13 million shares. It won’t take much to move the share price to a more reasonable valuation. A few eyeballs will do the trick, whether it’s a couple small funds or a bevy of retail investors looking for deals in a hot sector. It’s been years but I think Biorem is destined to have its day in the sun soon.
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