“Water, water, everywhere, nor any drop to drink.” – The Rime of the Ancient Mariner

While the Mariner may be ancient, his problem isn’t. Though water covers nearly 70 percent of Earth’s surface, only about 2.5 percent of it is fresh water suitable for human use. As we all know, access to fresh water is an acute problem. The World Health Organization estimates that 1.1 billion around the world don’t have access to any sort of treated drinking water and that as many as 2.5 billion people are at risk of disease and death due to unsafe water.

Human habits and tastes are only exacerbating the problem of water scarcity. Rising migration to urban centers, many of which are located in regions where water is already in short supply, has transitioned a third of the human population to water-stressed areas. For instance, since 1990 the urban population in China has more than doubled from 254 million to 691 million, and now outnumbers rural dwellers.

Many of those same countries are also experiencing the fastest population growth rates in the world, further pressuring fresh water supplies. At the same time, as standards of living rise so does the demand for meat, and raising animals requires more water.

The problem has become so severe that research group Eiris estimates water demand will exceed supply by as much as 40 percent by the end of the next decade. And while we tend to think of water scarcity as an emerging market problem, the United Nations projects that two-thirds of the world will suffer from shortages, including developed countries such as the US and Australia.

The situation is being exacerbated by the impact of climate change, which, while not actually impacting the absolute amount of water available in the world, is causing shifts in precipitation patterns. As a result, regions such as the Western United States, which once enjoyed fairly predictable rainfalls and snows, are now experiencing more frequent drought and flooding cycles. Despite rains that caused devastating flooding and mudslides in the West last month, it remains in a drought with 25 percent of California continuing to be rated at the worst drought level by the US Department of Agriculture. About 70 percent of the states range and pasture land are in poor to very poor condition.

Desalination processes have become less expensive with the introduction of the reverse osmosis technology that forces salty water through membranes to remove the salt rather than using evaporation, which is extremely energy intensive and, therefore, expensive. Unfortunately, osmosis-based equipment is still not a feasible option in many parts of the world.

So rather than simply “making” more water, the future of coping with water scarcity has more to do with conservation and efficiency than finding additional supply.

Preserving the Old

Amazingly, despite the increasingly urgent global water crisis, we are still extremely wasteful when it comes to what is arguably our most precious resource. According to data from the World Water Association, 40 percent of transported water in developing markets is lost from leaky pipes. In North America we lose about 20 percent. That costs utilities nearly $15 billion per year.

Here in the US, most of our water infrastructure is at least 75 years old. As a result, in an annual study conducted by the American Society of Civil Engineers our wastewater and drinking water systems received a “D” rating. The organization estimates that it would cost at least $3.6 trillion to receive a “B” rating by 2020.

Not surprisingly given both the real and marginal costs borne as a result of faulty infrastructure, water systems around the world are increasingly focusing on identifying faulty pipes and extending the life of their existing assets.

A small-cap Canadian company, Pure Technologies (Toronto: PUR), helps with precisely those types of projects.

That company has developed imaging technology it calls SmartBall Pipe Wall Assessment. This is a device that floats through water pipes, and using ultrasound and acoustics it identifies where leaks are based on wall stresses. Pure also applies its technologies to assist the global oil and gas pipelines identify deficiencies as well as to detect faults in buildings, bridges and other structures.

Despite being a small company with a market cap of about CAD366 million, it has built a robust business offering inspection services, monitoring equipment and engineering services. While the company’s earnings can be lumpy as it is still in a growth phase and at times is investing heavily in itself, during the past decade its revenue has grown from CAD10 million in 2004 to CAD61 million last year. By funding its growth largely through cash flow, the company carries no net debt.

Pure Technologies now generates about CAD7 million in recurring annual revenues tied to its pipeline monitoring services and, in the first quarter of this year, its project backlog reached an all-time high of more than CAD75 million. It also services clients in more than 30 countries, including both developed and emerging markets, though the America’s account for 87 percent of revenue.

First quarter revenue rose 2 percent year-over-year to CAD12.62 million while earnings per share were up from a CAD0.02 loss to CAD0.01. Gross margin also improved from 75 percent to 78 percent.

 Offering an impressive technology, Pure Technologies is a buy up to USD 11 as its order book continues to grow.

Installing the New

While Pure Technology focuses on making existing infrastructure last, Japanese company Kurita Water Industries (Tokyo: 6370) is an interesting play on new water infrastructure.

Providing a host of water treatment products and technologies, desalination equipment and high-purity water production systems, Kurita has been benefiting from booming emerging market orders with overseas orders now accounting for about 10 percent of sales outside of its home Japanese market. The rest of Asia accounts for nearly three quarters of revenue, with the remainder sourced in North America and Europe.

The company also has gotten a boost from the Asian electronics industry, which requires ultra pure water for its production processes. Largely thanks to those two drivers, the company’s net sales have grown from JPY146.8 billion in 2004 to JPY178.1 billion last year.

Over the long term, management sees its greatest opportunity in the emerging markets, which it anticipates will account for about a third of revenues over the next few years. Particularly, it expects to benefit from manufacturing’s shift away from China to other Southeast Asian countries where water quality is generally lower. That new industry will have to invest heavily in water infrastructure.

This secular trend in the manufacturing sector will help drive the company’s recurring chemical and services revenues, which are expected to grow to about half of total revenues. Recurring business provides a consistency in earnings, which will allow the company to continue dividend increases. The company has boosted its payout each year for more than a decade. Right now the dividend yield is about 1.5%

Kurita Water Industries is a buy up to JPY2800.