Water Megatrend 2.0: Regulations Force Multi-Billion Dollar Investment Boom

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Mandatory compliance and ageing infrastructure are driving a structural boom in Australia's water sector, validating companies pivoting to high-margin, recurring revenue models.

• Urban water CAPEX forecast to double to $10bn annually by 2027
• De.mem achieves first positive EBITDA on 43% gross margin (ahead of acquisition)
• PFAS remediation accelerates as Environmental Group secures first commercial contract
• Rivco Australia trades at -20% discount to NAV despite record profit
• Operating expenditure surges to 58% from 19% of total spending, favouring service-based models

By Valery Prihartono

From Drought Cycles to Regulatory Mandates

Australia’s water investment story has fundamentally shifted.

The 2024 narrative focused on climate-driven scarcity and drought cycles. Today’s reality is far more compelling for investors: non-negotiable regulatory mandates and critical infrastructure renewal are forcing unprecedented capital deployment regardless of rainfall.

The numbers tell the story. The Water Services Association of Australia forecasts annual capital expenditure in the urban water sector will double to over $10bn by 2027.

This isn’t cyclical spending driven by weather patterns; it’s structural investment mandated by compliance requirements and asset renewal that can’t be deferred. 

More critically for ASX-listed water companies, the composition of this spending has shifted dramatically. Operating expenditure has surged from just 19% of total water sector spending in 2009 to over 58% in 2022.

This structural shift directly advantages companies offering continuous service-based solutions over one-off equipment sales. 

The PFAS Catalyst: Compliance Creates Commercial Opportunity

Per- and Polyfluoroalkyl Substances (PFAS) remediation exemplifies how regulatory pressure is creating investable opportunities. These “forever chemicals” contaminate sites across waste management, airports, and military bases, with governments moving from investigation to mandatory action. 

Environmental Group ((EGL)) –market cap circa 89m– recently secured its first commercial contract for its patented PFAS extraction technology; a critical validation event.

The company’s Australian-patented Foam Fractionation process removes over 99% of PFAS from contaminated water, soil, and biosolids with zero excess waste. 

This commercial breakthrough de-risks the technology and confirms the market is transitioning from pilot programs to scaled deployment. With PFAS contamination widespread and remediation becoming legally mandated, the addressable market is expanding rapidly. 

SciDev ((SDV)) –market cap circa 56m– is similarly positioned for opportunity, making strategic moves into the US and European PFAS remediation markets where regulatory enforcement is accelerating ahead of Australia. 

De.mem: The Profitability Inflection Point

De.mem ((DEM)) has delivered the clearest validation of the recurring revenue model’s superiority in the water sector.

The company (market cap circa $31m) achieved its first positive half-year adjusted EBITDA of $556,000 in H1 2025, a dramatic turnaround from negative -$389,000 in H1 2024. More importantly, gross margins expanded to a record 43%, up from 18% in 2017. 

This margin expansion directly reflects De.mem’s strategic pivot toward specialty chemicals and Build, Own, Operate (BOO) services, which now underpin a 90% recurring revenue base.

The company’s bolt-on acquisitions (more on that below) are showing an average 69% revenue growth , while its proprietary NSF-certified Graphene Oxide-enhanced membrane technology progresses toward commercialisation for high-throughput applications. 

The EBITDA inflection validates management’s multi-year transformation from a capital-intensive equipment supplier to a high-margin service provider.

For investors, this represents the proof point the business model transition works.

Earlier this month, De.mem announced the acquisition of Core Chemicals, a specialty chemicals supplier to gold mining clients in Western Australia, for a total consideration of approximately $3m.

The purchase has been funded through an oversubscribed placement of De.mem ordinary shares at 10.5 cents per share.

Management has suggested significant revenue synergies through new gold mining client acquisition and cross-sell of expanded product and services portfolio.

The company’s total adjusted EBITDA for the 12 months ended 30 June 2025 was $885k.

The Core Chemicals acquisition would have added approximately $730k, pushing the pro-forma adjusted EBITDA for the 12 months ended 30 June 2025 to $1.6m.

Fluence: Deliberate Mix Shift Toward Quality Earnings

Fluence Corp ((FLC)) –market cap circa $95m– is actively reshaping its earnings quality through a strategic pivot away from volatile, lower-margin large engineering projects toward standardised Smart Product Solutions (SPS) and recurring service contracts. 

The margin differential is substantial. Traditional large engineering projects typically deliver approximately 15% gross margins, while Fluence’s standardised solutions and service contracts achieve margins between 25% to 40%.

H1 2025 revenue rose 64.7% year-over-year to US$33.1m, demonstrating strong momentum as this transition accelerates. The company’s global footprint and diversified contract base provide multiple pathways to capture the structural spending increase. 

For investors evaluating Fluence, the key metric is tracking the percentage of revenue derived from higher-margin Smart Product Solutions versus legacy project work.

The faster this mix shifts, the more valuable the earnings stream becomes.

SciDev: Industrial Chemistry Meets Global Compliance

SciDev’s business model centers on recurring revenue from its OptiFlox technology subscriptions and consumable chemical sales to water-intensive industries including mining, oil and gas, and chemicals. 

The company generated $103.4m in revenue for FY25, underpinned by the industrial sector’s non-discretionary need for water treatment solutions. Strict regulations governing industrial wastewater disposal create continuous demand for SciDev’s chemistry solutions. 

SciDev’s strategic expansion into US and European PFAS markets positions the company to capture regulatory-driven growth beyond Australia.

Industrial facilities facing PFAS compliance mandates represent a substantial addressable market that is only beginning to be quantified. 

Rivco Australia (ex-Duxton Water): The Pure Asset Play Trading at Deep Discount

Duxton Water, which recently rebranded as Rivco Australia ((RIV)), offers a fundamentally different exposure to the water theme as a Listed Investment Company managing permanent water entitlements in the Murray-Darling Basin. 

The company (market cap $231m) delivered a record half-year Net Profit Before Tax of $35.3m in H1 2025 while fundamentally strengthening its balance sheet. Rivco repaid $98m in debt, reducing gearing from 31% to just 5%. 

The compelling investment case lays in valuation. Rivco Australia are seen trading at a -20.43% discount to its post-tax Net Asset Value (NAV) of $1.86 per share. This discount exists despite record profitability, minimal gearing, and a strong dividend track record; the company declared its 17th consecutive and increasing dividend of 3.72 cents per share. 

For investors seeking stable, asset-backed exposure to water scarcity without operational execution risk, the present discount to NAV presents a clear valuation opportunity.

The permanent water entitlements the company owns represent increasingly scarce, non-replicable assets in Australia’s most critical agricultural region.

Investment Strategy: Recurring Revenue Quality Matters

The unifying theme across successful ASX water companies is the strategic pivot toward recurring revenue models.

Whether through BOO contracts (De.mem, Fluence), chemical subscriptions (SciDev), PFAS remediation services (Environmental Group), or asset leasing (Rivco Australia), the companies capturing investor attention are those building predictable, high-margin revenue streams.

This convergence isn’t coincidental, it directly mirrors the water sector’s shift from capital expenditure to operating expenditure.

As utilities and industrial users face mandatory compliance requirements and ageing asset bases, they are prioritising long-term service partnerships over equipment purchases.

The investment implications are clear:

• Assess Revenue Quality: Companies with high recurring revenue deserve premium valuations over project-based competitors. De.mem’s 90% recurring revenue base exemplifies this quality.
• Track Margin Expansion: Gross margin improvement signals successful business model transformation. De.mem’s journey from 18% to 43% margin validates the strategy.
• Valuation Opportunities: Rivco Australia’s -20% discount to NAV represents a clear entry point for investors seeking asset-backed water exposure.
• Regulatory Catalysts: PFAS remediation is transitioning from pilot programs to commercial deployment. Environmental Group’s first commercial contract and SciDev’s international expansion position are both to capture this growth.
• Global Leverage: Companies with international operations (SciDev, Fluence) can access larger regulatory-driven markets beyond Australia’s borders.

The Structural Tailwind Strengthens

Australia’s water sector presents a compelling structural investment thesis that is strengthening rather than weakening.

The shift from drought-driven cyclical spending to compliance-mandated structural investment creates durable tailwinds for companies positioned correctly.

The $10bn annual capital expenditure forecast represents just the beginning. As asset bases continue ageing and environmental standards tighten, the urgency of maintenance and compliance spending intensifies. The companies building high-margin, recurring revenue models are capturing disproportionate value from this non-negotiable investment wave.

For investors, the water megatrend 2.0 offers multiple entry points across technology providers (De.mem, SciDev, Environmental Group, Fluence) and asset managers (Rivco Australia). The key is identifying which business models align with the sector’s structural shift toward operating expenditure and service-based solutions.

The water sector’s evolution from equipment sales to service partnerships mirrors transformations in other infrastructure-adjacent industries.

Companies successfully navigating this transition are building defensible competitive positions and predictable earnings streams that, if sustained, should command premium valuations.

FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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