Stock Update

Why Nestle, Coca Cola and PepsiCo are not added to
Companies like PepsiCo, Coca Cola and Nestle are global players and belong to the biggest companies by market capitalization. Each of them has a diversified product portfolio with well-known global brands including bottled water brands. However, none of these companies is added to and the reason for this exclusion is actually quite simple. Buying Nestle, Coca Cola or PepsiCo stocks must not be seen as a water investment because each company generates most of its revenue beyond the water market. For example take a look at Nestle. In 2017, the Swiss Company generated CHF 90.121 Billion in total revenue but only CHF 7.455 Billion came from its water business. Thus, Nestle’s water unit contributed only round about 8 % to its total revenue in 2017. If you now consider buying Nestle stocks because you would like to invest in the water market, your investment is much more exposed to all other units of Nestle (food, coffee, pet food) but not really to the water market. The same is true for PepsiCo and Coca Cola. Consequently, we do not add these companies to because none of these stocks can be seen as a water investment.

The most attractive Chinese Water Stock right now
In the last couple of weeks, we have been asked several times which might be the most attractive Chinese water stock in 2018 concerning long term prospects and current valuation. Well, right now we see Beijing Enterprises Water as the most attractive long term stock in the Chinese water market. The company provides a range of water services and environmental protection services in China, Singapore, Malaysia, and Portugal and has even just bought a water supplier in Australia. It is especially engaged in water treatment and water supply operations. This makes it a solid investment with a stable cash flow and predictable dividend income even in a nascent bullish market or a worsening US-China trade dispute. Furthermore, the current valuations is quite attractive with a price/earnings ratio of 10.3, a price/book ratio of 1.47 and a dividend yield of 3.6 %. Another advantage which has rather been unrecognised is that the Chinese government is strengthening supervision of PPP (private public partnership) projects by reducing the number of projects and improving the quality of projects in its database. BEWG will probably benefit from this step because the Chinese government intends to support the participation of leading water companies with advanced technology, efficient management and rich project experience. What looks instead a bit concerning is the growing indebtedness of BEWG. The company is a highly leveraged one with debt levels having surged from HK$37.79b to HK$49.38b over the last 12 months. However, BEWG has an interest coverage ratio of round about 5, which can be seen as financially sound. Indeed, BEWG looks quite attractive for long term investors but as it does apply to every stock investment, closely study the balance sheet and debt structure of your next investment.

Alkaline Water has been added to
The US-based Alkaline Water Company has been added to The company exclusively sells bottled alkaline water which has been seen as a health-conscious product in the last couple of years. An investment in Alkaline Water might be a bet on a continued health-conscious lifestlye in the USA but also a bet on the fact that Alkaline Water can compete in this business area against big players like Coca Cola, Nestle and PepsiCo.

Xylem named to FORTUNE “Change the World” List
The water technology company has just been listed as number 7 in the “Change the World” list 2018 published by Fortune. Of course this once again shows the significance of water in the 21st century with Xylem being the so called ‘big player’ in the water business. Xylem covers almost all crucial water sectors ranging from water technology to water infrastructure and water technic. Responsible for its broad business activities is a buying spree conducted in the last couple of years. That is why the balance sheet looks a bit stressed right now and valuations like price-earnings ratio and price-book ratio overpriced. Quite rightly, Xylem has been named by Fortune as one of the most important companies to help the planet and tackle social problems and it is undoubtedly one of the best long term water investments right now but investors who are not yet invested in Xylem should rather wait on the sidelines, further analyse the company and try to get a cheaper buying opportunity.

Pepsi snaps up Sodastream
Everybody who has been invested in Sodastream since it was suggested on some years ago could already make a big profit. Now the profit is to get even bigger since PepsiCo has just announced that it aims to acquire the Israel-based home drink-machine maker for $3.2 billion. Back then, the company was recommended as an investment to get access to the health-conscious beverage market with Sodastream having a strong global presence and innovative products. Buying this stock now doesn’t make sense because the board of Sodastream has already agreed on the takeover price. Neither should Pepsi be seen as a water investment because most of the company’s reveneue is generated beyond the water / drinking water market. Investors might look at the US-based company Primo Water as an alternative to be invested in the growing water dispensers-market. Besides, it might also be a bet on combating the huge global plastic problem.

Amiad Water might become a potential takeover candidate
In July, the Israeli private equity fund FIMI announced that it had acquired a 9% stake in the water technology company Amiad Water Systems. The price it paid was $2.60 for each share on the London Stock Exchange’s AIM. However, FIMI is not known for buying a minority stake in a company like that because short of control it can’t undertake the turnaround measures it typically conducts for its portfolio companies. As a result, FIMI could make an offer to controlling shareholder Kibbutz Amiad, which now holds 48.5% of its namesake company. Right now, Amiad has a market capitalization shy of $57 million, rather small and thus vulnerable to acquisitions.

Merger between SJW Group and Connecticut Water
The all-cash acquisition of all outstanding common shares of Connecticut Water by SJW Group for $70.00 per Connecticut Water common share will create the third largest water and waste water utility in the USA after American Water Works and Aqua America. The combined company will be called SJW Group. The revised transaction is expected to close in the first quarter of 2019. Even though the acquisition is funded through a mix of debt and equity, SJW group is expected to maintain a credit rating of at least ‘A-‘ (Investment Grade). The disadvantage in this merger lies in the accumulation of additional debt in an interest rising environment, whereas the big advantage is the acceleration of the company’s growth accompanied by the improving of the cash flow stability. Additionally, SJW Group calculates that it will be able to continue SJW Group’s robust dividend history and continue to pay an attractive and stable cash dividend to shareholders. Anyway, investors should start focusing more on the ‘healthiness’ of (water) utilities’ balance sheets because of growing interest rates.

US Water Utilities as an appealing long term Investment
The water market in the Unites States is highly fragmented with 85 percent of people still get water from a public entity. As a consequence of this, investments in the water infrastructure have been deferred for too long. Since the government won’t be able to conduct critically needed water investments in the coming years due to growing budget deficits, public water utilities in the USA will be gradually handed over to private water companies like American States Water, American Water Works, Aqua America and York Water. As a result, those water utilities will gradually raise their customer base as well as their sold water volumes. Do not expect huge stock price rises in the coming years but do expect a steady and slowly growing dividend income.