UK drags European water index down

A clamp-down from Ofwat wiped more than £450 million off the value of listed UK water utilities. It helped the GWI European Water Index to under perform for the second month in a row.

Publicly quoted water stocks had something of a rough month, as quarterly earnings announcements revealed just how hard the global recession is biting. Although it rose by 5.9%, the GWI Global Water Index significantly underperformed the major stock indices (see below, right).

Europe was the only region to fall last month, with three of the four listed UK water utilities making an appearance in the top ten worst performers. Both Severn Trent and United Utilities ended the month more than 8% down, after Ofwat took a hard line when setting prices for the forthcoming five-year asset management period. Severn Trent is now down by 20% since the start of the year, while UU has dropped by 29% over the same period.

By contrast, some of the small-cap Asian stocks are up by as much as 169% since the start of 2009 (Sinomem), with Epure International 140% higher than where it ended 2008. The announcement of a major breakthrough in Saudi Arabia helped Epure to post a 20% rise this month (see story p20).

Water in the Americas had an altogether better month than Europe, rising by an encouraging 10.4%, with Cascal the top performer (up 35.3%). A recovery in Cascal’s share price is long overdue - could it be that investors are finally warming to the company's strategy?

Despite unseasonally wet weather in June, both the largest investor-owned US water utilities managed to increase revenues and profits during the second quarter. American Water's top line grew by 4% to $612.7 million, while its net result was up by 14% to $52.0 million. Aqua America's net profits grew by a similar margin (15%), while rate relief allowed its quarterly revenues to rise by 11% to $167.3 million.

Despite the solid Q2 numbers, Aqua America CEO Nick DeBenedictis warned that ongoing bad weather could affect third quarter results as well. He softened the blow by observing that encouraging rate treatment from state regulators, as well as new connections and customer growth through acquisitions, should help to ameliorate the effects of a wetter than average summer.

In the days following American Water's quarterly earnings announcement, parent RWE sold down another 20% of the company, reducing its stake to 26.5%. It is the second such sale this year, and reduces the stock overhang which has helped to hold back American’s share price since the company re-floated back in May 2008.

A poor performance in its waste division lopped 7% off Veolia's operating cashflow in the first half of 2009, the company revealed on 6th August. The 10% slump in revenues on the waste side was made up for by positive revenue developments in the other three divisions. Veolia Water led the way, with a 4% revenue improvement in the first half, much of which was thanks to the Veolia Water Solutions & Technologies subsidiary, where revenues increased by 12.7% to €1,224.5 million.

Suez Environnement, meanwhile, is due to report its half-year results on 26 August.

Basin Water's delisting on 17 August means the stock will be dropped from our index with effect from next month; we are looking at replacing it with Canadian growth play H2O Innovation, which we profiled last month (see GWI July 2009 p24). Its shares, which are traded in Toronto and Europe, are already up 38% this year.