Suez buoyed by market gains

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The company’s decision to sell Northumbrian Water has gone down well.

Two main themes emerged from our analysis of global stock markets in January. Firstly, the market reaction to Suez’s decision to sell Northumbrian Water was largely positive. Secondly, the water sector fell victim to the overall market malaise as investors grew nervous about the impact of a possible US attack on Iraq.

While the private water industry worried about the implications of the Northumbrian sale and Suez’s loss of the Atlanta contract, investors took a different view. Northumbrian operates in a highly regulated market where the potential to increase profits has been severely curtailed.

Pre-tax profits have actually fallen from £163.4 million in 1998 to £109.9 million in 2001, a decline of 33%. Clearly, figures like these were not enough to keep Suez interested in Northumbrian Water despite the obvious strategic benefits it could gain by owning the group.

Analysts have pointed out that the decision contradicts last month’s announcement from Suez that it would seek to pull back from emerging markets. In the cold light of day, however, any part of the group which does not fulfill Suez’s profit criteria is fair game. Either that or the company regards the UK as a developing market.

Analysis of Suez’s share price over the month makes for interesting reading. Although the loss of the Atlanta contract had been expected, the market still reacted negatively. Suez shares dropped 5.6% on the day, of the announcement. However, the news that Suez was seeking buyers for Northumbrian helped the company’s shares regain some of the lost ground. As our table on p.21 shows, Suez finished January up 6% in Paris and up 10% on the NYSE.

There are mixed views on the loss of the Atlanta contract. On the one hand, the situation gives plenty of ammunition to opponents of public-private partnerships and could be interpreted as a further setback for the US market.

On a revenue basis, however, its impact is negligible. The contract was worth annual revenues of $20 million, less than 4% of United Water’s total revenue in 2001.

Of the big three international private water companies, Suez fared best last month. While Vivendi Environnement (VE) and RWE have their own issues, both companies arguably lost out to the general
market fall as investors came down with a bad case of Iraqi war jitters.

Historically, markets have always slumped in anticipation of a conflict before recovering once fighting actually begins. For example, markets dropped 21% during the first months of the Gulf War, but eventually finished 1991 up more than 33%.

There is no escaping the fact that the fear of a war in Iraq is undermining investor confidence worldwide and global markets are showing symptoms of a pre-war slump. Investors are now looking for safe havens to ride the storm: while not offering the same security as gold or bonds, the relatively stable water sector may prove a strong defensive investment.

GWI compared the share prices of three US water companies to the Dow Jones Industrial Index during the Gulf War of 1991 (see graph on p.19). American Water Works (AWW), California Water Services (CWT) and American States Water (AWR) all consistently outperformed the Dow during the Gulf War, but each initially showed sluggish performance during the pre-war period.

Winners and losers
On a more positive note, Calgon Carbon was the top performer in January, showing a 19.5% gain.

Calgon attributed its performance to increased media scrutiny of perchlorate water contamination, a field in which the company is a specialist. Several recent stories have appeared in the Wall Street Journal on groundwater contamination in southern California caused by fuel spills from US Army facilities.

In contrast, the usually reliable water technology sector suffered losses last month. Readers of January’s GWI may recall that companies like Osmonics and Millipore performed strongly during the difficult market conditions of 2002.

However, Millipore’s shares fell 7.9% after the company announced that it had missed 2002 earnings estimates. Similarly, Ionics lost 4.2% of its value and Pall was down 8.2% for the month. Both companies continued to be affected by poor third quarter revenue figures released before the new year.

Cadiz, the worst performer of 2002 by some distance, has not admitted defeat quite yet. The company is continuing to manoeuvre its way around financial troubles stemming from its failed Mojave Desert groundwater project.

At the end of January, Sun World, a wholly owned Cadiz subsidiary, voluntarily filed for Chapter 11 bankruptcy. Cadiz itself was not named in the filing, but the move for Chapter 11 allowed Sun World to
secure $40 million in previously unavailable financing.

Historically, Cadiz has supplemented the annual working capital requirements of Sun World. However, the company determined that it would no longer be in a position to supplement the revolving credit. Cadiz also announced that it would ask shareholders to approve an ambitious reverse stock-split of between 1-for-4 and 1-for-25. The goal is to buoy up its share price to around $3.00 and eliminate the danger of being de-listed from the NASDAQ.

Some new faces
Our table of share prices and earnings data includes three new companies this month. Sabesp and General Electric have been added on the NYSE and Layne Christensen on the NASDAQ.

General Electric is developing a new water unit following its acquisition of Osmonics and BetzDearborn, while Brazil’s Sabesp – Latin America’s largest water company – is now fully registered with the
Securities and Exchange Commission as an ADR level III stock and is fully listed on the New York market under the ticker symbol SBS.

Layne Christensen has an active water development division which is being run by a former Pico director. The company has replaced Western Water to reflect coverage of the water resource development sector.