Evercore upgrades ERII

ERII is our top position. The share is up 80% since we published research on SeekingAlpha. We believe that share price could double from here during 2021. The reason is simple. The company has a unique technology, through which it managed to dominate desalination industry, where it has 90% market share with 70+% margins. Now they are trying to implement it into other industries. We are very bullish on ERII

Upgrade from Evercore:

Water Scarcity Coming Into Focus,
Upgrading ERII to Outperform

Positive secular trends in Water will continue. We are upgrading
Energy Recovery to Outperform from In Line. Water is not free and its
scarcity is increasing driven by global population growth, greater
demand for potable water, the energy transition increasing rare earth
mining, and government regulation. Wastewater treatment will be an
additional market opportunity. ERII is one of the rare growth companies
in our coverage universe as the company has grown revenues by over
a 25% CAGR in the last five years. ERII remains well positioned to
benefit from the rising demand for fresh water globally. Desalinating
seawater is increasingly being used to meet that demand. Additional
growth should be driven by aging thermal plants being retired and
replaced by desalination, OEM opportunities recovering, and private
funding supplementing national fiscal budgets for project investments.
Its oil and gas initiative is not being valued in the current stock price, in
our opinion, and we are not including any revenue contribution for
VorTeq in our forecast. We are increasing our target price to $16 (from
$12), which is based on a SOTP valuation.

Investment Thesis.

ERII is benefiting from rising demand for fresh water globally as desalinating seawater is increasingly being used in
certain parts of the world (Middle East, Asia) to meet that demand. In
addition, the industry transition from aging thermal plants to seawater
reverse osmosis desalination should drive additional demand
opportunities. In its Oil & Gas segment,

ERII remains focused on finding a live well frac opportunity but the hard timeline to commercialize VorTeq remains in place of mid-2021. The stock is also benefitting from the increasing market focus on ESG-related companies. We are increasing our 2021 and 2022 EPS estimates to $0.30 and $0.60 from $0.12 and $0.45 to reflect lower opex since we are not including any VorTeq revenue in our forecast.

Key Thoughts on ERII:
 Its water segment is currently experiencing an extended growth
cycle driven by mega project activity and continued positive
underlying trends in desalination. Its Water segment revenue will
likely grow by 20% YoY in 2020 then slowing to 10% in 2021 before
re-accelerating to 20% in 2022.
 Positive desalination growth drivers: 1) global population growth
and need for access to clean water, 2) the technological shift from
thermal desalination to reverse osmosis, 3) geopolitical shifts
creating a new strategic need for desalination, and 4) private
funding supplementing national fiscal budgets for project

Key Thoughts on ERII:

 Potable water demand expected to increase by 30% by 2050 according to the United Nations worldwide water report. Potential for 100-150 thermal plants to be replaced by newSWRO mega projects to maintain current water supply levels.
 Incubation initiative identifies an opportunity in wastewater treatment. Its Zero Liquid Discharge (ZLD) received its first commercial order from a customer in India. Several companies have highlighted that a regulatory push for a more environmentally friendly policies in industrial wastewater treatment.
 Hard timeline to commercialize VorTeq by mid-2021 remains in place. Next steps are complete a live well frac, validate customer value proposition, and maximize the amount of sand that can be processed through the cartridges.

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