Invest in water: the world’s most valuable resource
David J. Stevenson explains why now is the time to invest in water as the world heads towards a crippling global shortage.
Water is the world’s most important resource and its most abundant commodity, but for those who want to invest in water, there are limited options.
Water covers about 71% of the Earth’s surface. There are 326 million cubic miles of it on the planet, according to the US Bureau of Reclamation. However, 97% is seawater that – untreated – is far too salty for human consumption, growing crops, or most industrial uses except cooling. Only 3% of the Earth’s water is fresh.
Furthermore, five-sixths of this is useless for humanity. It is either locked within glaciers, polar ice caps, soil or the atmosphere; too highly polluted, or too deep below the planet’s surface to be economically extractable.
The upshot? Just 0.5% of the Earth’s water is fresh, available and potable. So this is a major problem that needs addressing.
The opportunity to invest in water
By 2025, more than 1.8 billion people will live in conditions of absolute water stress and more than two-thirds of the world’s population will experience water-related problems, says Veolia.
The Centre for Strategic and International Studies (CSIS), a think tank, estimates that overall water infrastructure will require an additional $22.5trn by 2050.
The global desalination market, meanwhile, was valued at $16.5bn in 2020 and is expected to reach $28bn by 2026, growing at a compound annual growth rate of 9.32% from 2022 to 2027, according to Arizton Advisory & Intelligence, a market research group.
That implies global capital expenditure of $100bn on desalination over the next four years.
Longer-term, the sector should continue to grow strongly as improved technology and better energy efficiency help to lower the costs of desalination. We highlight two water stocks below.
The stocks to buy now
Veolia Environnement (Paris: VIE) is a French water, waste and energy business. It designs, installs, operates and maintains water networks of all kinds.
Last year it managed 3,367 drinking water production plants and provided 79 million people with potable water. It also supplied 61 million people with wastewater services.
While Veolia isn’t a pure desalination stock (very few quoted companies are), it’s the top global player. Veolia also offers desalination units and mobile water treatment plants deployable temporarily or in emergencies.
Following its merger with former rival Suez, Veolia has a €17.6bn market capitalisation. Sales for the nine months to 30 September 2022 were €30.7bn, 43% of which came from the group’s water activities.
One caveat is net debt: this has increased to €22.2bn from €9.5bn the year before due to the cost of taking over Suez.
Veolia sells for 2023 prospective price/earnings (p/e) ratio of 13.9, according to average analysts’ estimates, with a p/e of 11.6 pencilled in for 2024. This valuation reflects anticipated 20% earnings per share (EPS) growth over the next two years.
The historic yield is 3.8%, which should improve as the company has confirmed that dividends will move in line with earnings growth.
A pure play way to invest in water
Consolidated Water (Nasdaq: CWCO), with a market value of just $220m, is a purer play than Veolia. It designs, builds, operates, and (sometimes) finances seawater reverse osmosis (SWRO) desalination plants and water distribution systems in several Caribbean countries, where the supply of drinking water is scarce and the use of SWRO is economically feasible.
The company’s water utility business produces and supplies potable water to two of the three most populated areas on Grand Cayman island. CWCO also produces and supplies potable water under long-term contracts to government utilities in the Cayman Islands, The Bahamas and British Virgin Islands.
The manufacturing division, meanwhile, makes a wide range of specialised water-related products and systems for commercial, municipal and industrial water production, supply and treatment.
Revenue for the first nine months of 2022 was $65.7m, up by 31% year on year. As of 30 September 2022, the firm held cash of $51m while debt was just $0.2m.
The stock, down more than 25% from its September peak, is on a prospective p/e of 14.9 for 2023, according to average analysts’ estimates, with a 13.5 multiple forecast for 2024.