Near-waterless washing machine specialist Xeros could be valued up to £100 million when it joins Aim this month. About a third of that valuation will be new cash to help accelerate sales of its machines and advance studies into equipment that can clean other items apart from clothes, such as leather, metal, glass and wood. With 30 installations already secured in the US, UK and EU, this is a credible growth story and we reckon the shares will do well immediately upon admission.

Spun out of IP (IPO), Xeros uses polymer beads in special washing machines. The cleaning system could be a disruptive force in the laundry market thanks to significant cost savings as it uses nearly three quarters less water and half the amount of power and detergent as a traditional washing machine. What a customer saves in costs, they pay in additional service charge. A commercial laundry would likely need to change the polymer beads every two months, versus every three years for domestic users. Xeros will resell the used beads as a secondary revenue source.

While the operating costs benefits are offset by service fees, there are long-term financial benefits that make Xeros’ offering very compelling to industrial users, particularly anyone involved in workwear rental. It claims clothes last longer and don’t fade as quickly when washed via its cleaning process. So companies which clean and hire staff uniforms won’t have to incur costs of replacing shirts or other garments as often as before.

Yet herein lies what we can see as the most obvious risk to the investment case. Xeros has built the cost of the machine into the monthly service fee. A customer signs a five to seven-year contract and will own the equipment at the end of that period. This means there’s big working capital pressures for Xeros, having to fund the machines and wait a long time to get a return on investment. We don’t yet have details on any securitised debt that may fund machines - this will be one of the key points to research when the admission document is published.

We also don’t believe it is worth chasing the domestic market, despite reassurance from the firm that consumers are willing to move away from the existing technology. Asian manufacturer Sea-Lion, which makes the machines, is seen to be Xeros’ ticket to expanding in China. The drive for US sales should be helped by utility company rebates to the customer for investing in the kit thanks to its environmental benefits.

The industrial proposition looks credible and we reckon this float will have wide appeal to investors with an appetite for risk.

SWOT ANALYSIS

STRENGTHS

• Customer orders secured

• Disruptive market potential

• Multiple patents granted

WEAKNESSES

• Working capital pressures

• Unattractive domestic expansion

• Regular bead replacement

OPPORTUNITIES

• Geographical expansion

• Secure multi-site contracts

• Expand cleaning range

THREATS

• Slow industrial take-up

• Funding question marks

• Beads get stuck in clothes