Portfolio

Long Term Capital Appreciation



SABESP

Strengths

  • Monopoly with regulated business activities
  • Stable increase in water connections
  • Prepared for possible next drought

Risks

  • Political instability in Brazil
  • High proportion of foreign currency debt (exposed to foreign currency fluctuations)

SABESP is the largest water supplier in Latin America and currently operates in 372 municipalities within the state of Sao Paulo, which in turn is economically the most important state in Brazil. The water and wastewater tariffs are regulated and subject to annual inflation, which enables the company to pass on price increases to its customers on a permanent basis. SABESP was able to continuously expand the water and wastewater connections by taking over or gaining new supply areas. However, there is still a lot of potential in the Brazilian water market, as access to water in Brazil is still underdeveloped. SABESP has learned from the 2014-2015 drought which had critical consequences to the company. Since then, it has invested in water reservoirs and water storage systems in order to be better prepared for a possible new drought period in the future.


The Brazilian government itself is currently causing unrest and political instability, which could have negative social and economic consequences. The fact that the state of Sao Paulo is the controlling shareholder of SABESP with a 50.3% stake means that privatization is still an option. It could also undermine the effectiveness of the company’s governance structure, however, the political intentions remain uncertain, including how much the government intervenes in the company. Foreign currency debt accounts for a relatively large proportion of SABESP’s total debt exposure. Foreign currency debt is primarily quoted in USD and JPY (unhedged). However, the Brazilian real has depreciated significantly against the US Dollar in recent weeks, but at the same time SABESP continues to generate 100% of its sales in the local currency, the Brazilian real. As a result, servicing the foreign currency debt becomes more expansive. However, due to the generally declining interest rates in Brazil, the company is currently reducing its foreign currency debt exposure. Nevertheless, a further devaluation of the Brazilian currency would have further negative consequences for SABESP.


SABESP - Brazilian water supplier

    
2014201520162017201820192020

Forecast

Net Operating Revenue (includes construction revenue) in R$ Billion

11.2111.7114.1014.6116.0917.98

Adjusted EBITDA Margin %

26.033.932.436.10.4070.418

Net cash generated from operating activities in R$ bn

2,4802,6403,0003,3003,8404,200

Net Income in R$ Million

903536.32,947.12,519.32,835.13,367.5

Earning per Share R$ Diluted

1.320,78 (-40,91%)4,31 (+452%)3,69 (-14,4%)4,15 (+12,47%)4,93 (+18,8%)

Dividend per ADR Share in USD

$0.1172$0.066$0.3626$0.2719$0.3022$0.2518

Water/Sewage Connections in Million

8.21/6.668.42/6.868.65/7.098.86/7.309.05/7.499.93/8.32

Water and Sewage Billed Volume - million m3

3,643.13,394.43,542.53,693.13.749,03.879,7

Water Loss %

302931.830.730.129

Foreign Debt to Total Debt in %

40.350.448.645.4550.748.0

Net Debt /Adjusted EBITDA

5.254.624.253.753.23.00

Debt/Equity Ratio

1.281.461.111.261,231.15



Beijing Enterprise Water Group

Strengths

  • Business activities with promising future prospects
  • Diversified water portfolio
  • Benefits from public-private partnerships

Risks

  • Relative high debt burden
  • Most of the profit is generated in China – Weak global diversification

Over the years, BEWG has constantly invested in those water sectors that have great long-term potentials and could be in greater demand in the future. The management follows a long term approach and it tries to adapt the business activities to environmental related challenges and changes. At the same time, however, it has diversified business activities, which means that it can better compensate for cuts in government infrastructure expenditures. The management also intends to develop BEWG into an asset light model company, which can reduce costs and profit fluctuations. Above all, an asset light model promises more flexibility with the positive effect that BEWG can react faster to new upcoming trends in the water market.


Due to the high level of investment, which will probably pay off in the long term, BEWG has a high debt burden. The company can still finance itself cheaply at the moment, but the individual debt ratios should not increase further, since companies should generally have a healthy balance sheet, especially in times of crisis. BEWG receives a certain proportion of its orders from municipal clients. However, across the country city governments have accumulated large mountains of debt in the past 10 to 15 years, which could lead to a decline in orders from cities and municipalities in the short to medium term. Though, it remains to be seen how the government in Beijing will deal with the increased debt burden of cities and municipalities in the future. One factor of uncertainty is definitely the sharp and steady rise in debt across the country. Although BEWG benefits greatly from public-private partnerships (PPP), it is also unclear how far Beijing’s political hand actually intervenes in the company or could intervene in exceptional circumstances.


BEWG - Chinese Water Treatment

   
2014201520162017201820192020

Forecast

Debt/Equity Ratio

2.032.042.342.25

Interest Bearing Debt / Equity Ratio

1.341.321.471.33

Net Debt/EBITDA

7.89.488.848.74

Revenue in billion HKD

8.9213.517.3321.1924.5928.19

Water treatment services as % of total revenue

362621191918

Water distribution services as % of total revenue

9689109

Construction service / building as % of total revenue

526265666264

Tech. Serv. and sale of machineries as % of t.r.

366699

Net Margin in %

2018.1818.5917.5418.1817.47

Net cash flow used in operating activities in million HKD

264-2,627-2,500-6,714-5,573-4.230

EPS HKD (Diluted)

0.20,28 (+40%)0,36 (+28,6%)0,42 (+16,7%)0,4713 (+11,5%)0.4904 (+4,05%)

Dividend per Share in HKD

0.0780.0950.1190.1550.1780.185



Amiad Water Systems

Strengths

  • Smart irrigation technology as a long-term growth driver
  • Growing engagement in India
  • Low debt level
  • In Summer 2020, Amiad signed a new five-year global distribution agreement with Netafim

Risks

  • Small market capitalization associated with typical small cap risks
  • Increased fluctuations in profits and prices, no dividend foreseeable

Over the years, Amiad Water Systems has developed two core markets – water filtration solutions and smart irrigation technologies. The irrigation technology market in particular is likely to develop very well over the long term due to demographic changes. It is crucial, however, that Amiad further engages and invests in this market and that it won’t be driven out of the market by bigger competitors. The cooperation with Netafim and especially the strategically very important full takeover of Amiad India shows positive signs in this regard. In addition, Amiad has generated constant positive operating cash flows and it has a healthy balance sheet with sufficient liquidity reserves and a low debt level.


Amiad currently has a low market capitalization and it should be seen as a small cap company. Investments in small caps are generally riskier because the future prospects are characterized by more uncertainties than those of established companies. However, Amiad has a solid capital base atypical for smaller companies, which reduces the overall risk. Nevertheless, Amiad‘s profit fluctuations are too volatile and far from constant growth. In addition, the company is currently not paying a dividend. It is crucial for Amiad to assert itself in the market for smart irrigation technologies in the long term. It must not lose market shares to competitors such as Xylem or Lindsay. To achieve this, it is essential to require sufficient research and development investments in the long run.


Amiad Water - Israeli Water Technology

   
2014201520162017201820192020

Forecast

Debt/Equity Ratio

1.230.990.870.930.901.35

Interest Bearing Debt / Equity - Ratio

0.670.460.430.430.450.48

Net Debt/EBITDA

17.434.359.238.756.76.49

Revenue in Millionen USD

118.5118.8105.6112.3113.9115.6

Operating Profit in Million USD

2.98.83.74.66.13.1

Net Margin in %

-0.834.272.283.693.30-0.77

Net Cash generated from Operat. Activ. $Mio

-3.5315.464.894.550.1311.52

EPS in USD (Diluted)

-0.065+0.166+0.095 (-42,77%)+0.14 (+47,67%)+0.10 (-28,57%)-0.081

Dividend per Share in USD

-0.0670.0320.028---

Research and Develeopment, net $Mio

3.162.933.403.703.643.57

PrudentWater