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Time to waterproof your investment?
Singapore-listed water stocks are well off their highwater
marks... As a basket, prices of water stocks are
35% off their peak in Oct 2007 compared to STI’s
decline of 24%. YTD, the same basket is down 30%
compared to STI’s 17% decline. Valuations wise, the
Singapore sector now averages 10x FY08F and 8x FY09F
PE on EPS growth of 21% and 17% respectively,
compared to the next closest basket of HK/China peers,
which is trading at average PEs of 23x FY08F and 18x
FY09F on EPS growth of 16% and 24% respectively.
…when growth outlook remains firmly backed by record
orderbooks and buoyant long term trend. Thanks to the
bonanza of contracts last year until now, EPC orderbooks
of major water companies in Singapore are still at record
highs, providing earnings visibility through 2009/2010.
Going forward, orderflow momentum should continue
given rising consumption (on the back of population
growth and industrialization) and growing awareness for
environmental protection. Besides a continuous flow of
wastewater treatment projects from China and India,
there would also be more desalination contracts out of
water-parched nations in the Middle East and North
Africa region (MENA).
Key is to manage rising costs and overcome project
financing. Companies are currently facing margin
squeeze from higher labor and soaring material costs,
and the prevailing credit crunch has made raising debt
for project financing much harder and more expensive.
Stronger players with proven track records who can
better handle cost increases and obtain funding to bid for
new projects through debt/equity market or capital
recycling vehicle like a water trust would still be able to
keep their heads above water to eke out decent growth.
Our top picks are Epure, Hyflux, Asia Environment and
Hyflux Water Trust.
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