Investing in Water Part II


Yesterday’s message, Water I, looked at the importance of water.

little horse creek

Little Horse Creek at Merrily Farms

That article viewed investing in land with water.

Another way I invest in water is with shares in water processing companies.

An interesting downwards trend has developed in water shares.  I always look twice when something about a clearly needed fundamental seems amiss. In this case… the world needs water!   Why would shares in water companies fall?

This series will revisit the three water companies we held in our Green Portfolio that rose 260%+ before the 2007 crash…  Hyflux, Kurita Water Industries and  Séché Environnement SA.

Then we’ll look at an investing tip that can make sure that water shares do not leave your investments and savings all wet.

This message looks at Hyflux Ltd chart from sg.finance.yahoo.com.   Hyflux trades in the USA as OTC code HYFXY.

water share chart

(click on photo to enlarge)

Hyflux shares up +590% in ten years.

We have been recommending (and investing ourselves) in Hyflux since 2004.  Each time the price drops I mention these shares again.

Right now one downwards concern (that could continue to press) on Hyflux shares are its large contracts in the Middle East and North Africa region. This business contributes 60 percent to the groups revenue.

We first recommended Hyflux in 2004.  Then we wrote about Hyflux again in 2008…  both times before the shares began to rise.  You can see in the chart above how those who purchased Hyflux in 2004 and 2008 have been in a position to make huge profits.

Here is what I wrote in 2008:

#1: Is Hyflux a well managed company?

I have liked the management team for years. The group is headed by Olivia Lum who has proven to be an astute leader. Hyflux Limited SGX: 600 began in 1989 as Hydrochem (S) Private Limited, a trading company selling water treatment systems in Singapore, Malaysia and Indonesia and later, China. Lum has been progressive. She added a team of scientists and engineers that created technology for Singapore’s water recycling plants that filter and treat waste water.

These technologies are based on semipermeable membranes and reverse osmosis that is capable of extracting potable water from residual, sewage and salt waters.

Hyflux was the first water treatment system company to be listed on Singapore’s equivalent of NADAQ in 2001 and the first to be upgraded to Singapore’s main exchange in 2003, again making history.

The group has been expanding geographically first to China, then lucrative Middle Eastern markets and is now entering India, Southeast Asia and Africa.

#2: Is the company in a growth industry?

There are few sectors with as much potential as water. China, the Middle East and India offer special opportunity.

#3: Are the shares available at a good value?

The shares are certainly a better value than a few months ago as the chart above shows.

I am writing about Hyflux again now because the global stock market sag has pushed Hyflux shares down once again and created extra value.
However as you can see from the company’s financials, sales, profits and dividends are at all time highs!

hyflux data

This is a good time to be looking at Hyflux shares.

An investment in Hyflux by the way, also represents an investment in Singapore dollars so all the numbers above have been enhanced by this added forex growth.

spre dollar

This chart from sg.finance.yahoo shows the benefits of a multi currency portfolio as the Singapore dollar has given a 20% extra profit versus the US dollar over the past five years.

More Vital point About Investments and Water.

The United Nations Water agency UNwater.org says:  A Drought in Your Portfolio?

The World Water Assessment Programme (WWAP) participated in the EIRIS conference on global water risk research. The conference explored the investment case for considering the risks and opportunities arising from water scarcity as part of a wider sustainable investment strategy, and heralded the launch of the EIRIS’ Global Water Risk report.

The report shows that out of the 2000 global companies analysed 54% are exposed to water risks but take little or no action to mitigate them, and approximately half show no evidence of any management response to water risks whatsoever.

The shares fell in 2011 due in part to the facts that the Middle East and North Africa (MENA) region, contributes 60 percent to the group revenue and delays to the company’s Libya contract as well as overall concerns about its Middle Eastern exposure.

On the positive side, not long after Hyflux was chosen as the preferred bidder to build and run Singapore’s largest-ever desalination plant, it was worth a total of S$890 million ($703 million).

Hyflux also added a concession to build and operate a plant to treat up 150,000 cubic meters of wastewater per day for Zunyi City in China’s Guizhou province.

An August 2012 Reuter’s article entitled “DBS downgrades Hyflux to hold” Said:   DBS Vickers downgraded water treatment firm Hyflux Ltd to hold from buy and cut its target price to S$1.45 from S$1.66, citing less-than-expected second quarter earnings due to weak margins for Singapore.

This was interesting since Hyflux had record profits in the first quarter of 2012 and second quarter net profits rose 21 percent from a year earlier to S$17.5 million.

What caught my attention in the article was the statement: The Arab Spring caused a drought in water contracts over the last 2-3 years, resulting in pent-up demand, DBS said, adding it believes Hyflux was bidding for two major projects in Saudi Arabia and Oman.

This creates a special three point opportunity… strong currency… undervalued sector and pent up demand for a well managed company.

This may not be quite the time to jump in (though I do hold Hyflux shares myself since I usually try to get in ahead of the rise).

Here are three important points about share investing to remember.

#1: Cheap stocks outperform expensive stocks.

#2: Stocks in companies with rising earnings outperform stocks in companies with falling earnings.

#3: Stocks with high earnings and rising earnings outperform stocks with low and falling earnings.

In other words, look for high quality companies with share prices already in established up trends that are cheap (price earnings), with high and rising earnings and increasing attention from the market.

Hyflux shares meet all the criteria except the action and market attention.  When these events fall into place expect some great opportunity.

We’ll look at Kurita Water Industries and  Séché Environnement SA later in this Water Investment series because water shares have been falling while the need for good water in on the rise.

Go to Part Three of this “Investing in Water Report” report. Click Here.

Gary

Read  DBS downgrades Hyflux to hold


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