How Modern Water shares made a 500% profit in five weeks

We wrote recently about how investors could have doubled their money in less than four months. In fact, there were 42 companies who would have returned 100% or more between the end of December and late April. Now, there's another to add to the list, and its performance is quite amazing.

AIM-listed Modern Water started the year at just 6.24p, and little happened until April. Today they changed hands for as much as 38.41p.

So why have they rocketed a phenomenal 510% since the 6.3p close at the end of March?

The likely answer can be traced back to a regulatory news announcement in October 2014 when chief executive and co-founder Simon Humphrey told us a joint venture with Northumbrian Water had won a £22 million contract to build a new wastewater treatment plant in Gibraltar.

Modern Water has spent more than £20 million over the past decade developing technologies that help supply fresh water and both treat and recycle waste water. A membranes division houses its Forward Osmosis (FO) platform for seawater desalination, while its monitoring business makes instruments to analyse and monitor contaminants in water, soil and food.

Alongside final results in March we heard that nothing had changed with the Gibraltar contract, although "given the region's current challenge following the Brexit vote, uncertainty remains over potential timescales".

The sale last month of its FO technology for seawater desalination to Hangzhou Water in China was well-received, as was news it had appointed an experienced vice-president of global sales and a sales manager in China.

But it is last week's European Court of Justice ruling that the UK government broke EU clean water laws that really lit the touch paper.

Overflow pipes used to relieve pressure on Britain's ageing sewage system meant excessive waste was discharged into the sea off Carmarthenshire, a protected area. There were also numerous breaches around the handling of waste water in England and Gibraltar.

And it's the Gibraltar ruling that's interesting. Finding the UK guilty of failing to fulfil its obligations under EU law by not treating Gibraltar urban waste water, might just prompt politicians to speed up the wastewater treatment plant project.

Clearly timing is an issue here, and there's no guidance currently.

It's also worth asking whether the contract justifies a market capitalisation at the 38p peak of over £30 million. In January it was less than £5 million.

Analysts at WH Ireland appear to have a pretty good grasp of things. In February, the broker initiated coverage of the company, slapping a price target of 15p on the shares when they were worth just 6.25p.

"With its now proven technologies, we believe that the market opportunity is significant, if the group can execute its commercialisation strategy successfully," wrote John Cummins. While "not easy" to place a fair value on a company at this stage, his target was "supported by both multiples ascribed in the monitoring sector and [intellectual property] held within membranes".

Crucially, he admitted assumptions for the divisions were "conservative" and that forecasts would include none of the potential benefit of the Gibraltar contract until there is greater clarity. Well, things may be about to get a great deal clearer.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.