A Hot Play on Cold Water

05/05/2009 10:04 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says a beaten-down Dutch IPO is one of the few pure plays on the emergence of water resources.

Is water the new oil? Water falls under the umbrella of the global infrastructure theme and it involves a lot more technology and growth opportunities than one might expect.

But while the water investment story seems to be everywhere, there are relatively few drops for investors to drink. There are two water ETFs of note: PowerShares Global Water Portfolio (NYSEArca: PIO) and Claymore S&P Global Water (NYSEArca: CGW).

But these funds tend to stretch the definition of what constitutes a "water" company to find enough names to fill a whole portfolio. France's Veolia (NYSE: VE), for example, has important water assets, but they also have a big waste management operation. Danaher (NYSE: DHR) pops up because they make filtration technology, but they also make dental equipment, tools for mechanics, and a whole slew of other things.

Cascal (NYSE: HOO) is a rare pure play. Incorporated in the Netherlands, the company owns a portfolio of water industry assets in the UK, Asia, South Africa, and Latin America. It reaches 4.3 million residential and business customers, mainly through water utility services and waste water treatment. Revenue last year was $160 million, all of which came from water-related activities. (By the way, if you're curious about the odd ticker symbol, think about the chemical formula for water. Clever, eh?)

Cascal defies easy geographic classification. About half of its revenue comes from the UK, where it operates the Bournemouth & West Hampshire water utility. The rest is a global grab bag, including 13% in South Africa, 12% in China, 8% in Indonesia, 6% each in Chile and Panama, and 2% in the Philippines. Each country is essentially an independent business, so there is built-in diversification.

It's also a defensive play in the sense that pricing and returns are typically regulated and governed by 20- to 25-year contracts. Yet unlike a mature utility, Cascal still has a lot of room to grow by winning new projects and expanding into new markets around the globe.

Like many recent initial public offerings, Cascal was born under a bad sign. It went public in January 2008 at $12. Shares have since collapsed to a recent $3.50. In February, Credit Suisse did a sum-of-the-parts analysis, looking at the value of each of Cascal's subsidiaries as if they were stand-alone companies, and came up with a valuation of $5.20 per share.

This sort of back-of-the-napkin stuff never works out quite as well as planned, but it does suggest that Cascal might be worth a lot more than what the market thinks at the moment. Credit Suisse expects Cascal to earn 56 cents per ADR this year. At current prices that works out to a P/E multiple of less than [seven times]. And with a dividend of 18 cents per share, it offers [nearly a] 6% yield.

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