Global Power Plays

12/24/2004 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Selected foreign-based utilities offer high yields and a chance to bet safely on the world’s most robust economies," says utility expert, Roger Conrad. Here, the co-editor of Personal Finance, profiles the best opportunities in "global power."

"Many of the world’s most exciting utility companies are based overseas. Some are financially powerful, and some are cheap with big yields. Others have had sizeable run-ups during the past year and are potentially volatile. All of these picks, however, should generate solid total returns in coming years, both from expanding businesses and growing dividends. And they’ll get another kick in coming months if their home currencies gain strength. Those that trade on the NYSE are easiest to buy, but any reliable broker can buy those trading over-the-counter.

"Asia is the world’s hottest growth story. And despite China’s attempts to slow its economy this year, that should remain the case for the rest of the decade. Hong Kong-based CLP Holdings (CLPHY OTC) has taken a ‘go slow’ approach when it comes to expanding in China, while diversifying into steady Australia and high-growth India. In addition, at CLP’s core is a regulated Hong Kong utility that generates guaranteed, high returns. Coupled with its use of nuclear power, CLP has been able to thus far avoid most of the cost pressures eating at the bottom line of other Chinese electric utilities. That puts it in prime position to cash in on future opportunities on the mainland as markets cool. CLP is a buy up to 6.

"Hong Kong & China Gas (HOKCY OTC) continues to enjoy rapid growth from investing in fledgling mainland natural gas distribution utilities. Like CLP, the company’s secure Hong Kong core generates powerful cash flows from guaranteed regulated returns. The company also owns gas pipelines that serve its facilities, and it operates other ‘green’ businesses. Uniquely, it manufactures its gas from low-sulfur naphtha, a process that also reduces air emissions of the gasses that cause acid rain and global warming. Investors have begun to catch on to the company’s story. But with numerous opportunities to expand its China business, it’s worth far more than even its seemingly high valuation. Buy Hong Kong & China Gas up to 2.50.

"Power demand in India is perhaps even more explosive than in China. The easiest way for foreign investors to take advantage is to snap up a few shares of giant conglomerate Tata (TPWFF OTC). The company’s Tata Power unit has operated for nine decades, recently becoming India’s biggest non-government power producer. Of all the stocks on our list, Tata is likely to be the toughest to buy. Indian markets also tend to be volatile, including giants like Tata. But those willing to persevere will find a lot of profit in Tata Power up to 9.

"Our fourth Asia play is  Korea Electric Power (KEP NYSE). Selling for just seven times trailing 2004 earnings, barely six times 2005 estimates and at 40% of book value, it’s also one of the cheapest electric utilities anywhere. Korea Electric generates almost all of the power consumed in South Korea. More than 40% of power is generated from nuclear and hydro sources, which aren’t affected by fossil fuel costs. It also holds a monopoly on transmission and distribution in the country. The company is now expanding in North Korea as well. Korea Electric remains a buy up to 15 for patient risk takers.

"The remaining three picks on our list are firmly rooted in the Old World, with secure, cash-generating European utility franchises. But management has also opened up high-potential avenues to growth in the New World. RWE (RWEOY OTC) is a member of our growth portfolio. Its massive German asset base has been supplemented in recent years with acquisitions of water utilities in the US and Britain and is now among the world’s largest liquid plays. Energy, however, remains its key business, particularly power generation. RWE is a buy up to 55.

"Italy’s dominant electric utility ENEL (EN NYSE) is more Euro-centric, focusing strongly on managing its generating business (44% national market share) despite investments in the Americas. The Italian government partially spun off the company to the public in November 1999 and sold another 20% earlier this year, a move that required a hefty dividend increase to attract investors. The stock has since surged, but remains cheap due in part to investor fears about the government’s plans for the remaining ownership stake. Fundamentally, Enel is very sound. And reduced reliance on oil—which generates much of Italy’s electricity—gives the company a cost advantage over rivals as well. Buy Enel up to 50.

"Latin America’s revival from the crash of the late 1990s is starting to kick into gear. The best power play on the region is Endesa (ELE NYSE), Spain’s dominant electric utility that’s built an empire during the past decade stretching from Chile to Venezuela. Testifying to the robust health of both its Old and New World businesses, the company enjoyed an 11.8% boost in output over last year’s levels. Like its home country, Endesa’s current focus is on improving ties with the rest of Europe. The company now controls major franchises in both France and Italy, with a focus on lower-cost fuels. Perhaps in part due to investor trepidation about its presence in countries like Argentina, the stock remains cheap, yielding nearly 5%. Endesa is an excellent buy for value hunters up to 24."

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