Goldman backs water sector

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The investment bank rates the water sector as ‘attractive’ thanks to the looming global water crisis.

Investment bank Goldman Sachs has lent its weight to the momentum building behind investment in the water industry with a comprehensive research note on the sector. It is one of the most extensive surveys on water to have come out of a major institution over the past year, although in its enthusiasm for the sector, it at times overlooks some of the significant nuances of the industry.

As with many others trying to build interest in the water sector, Goldman Sachs uses the comparison with the oil industry: “Petroleum for the next century”, according to Deane Dray, Jack Kelly and Kevin McVeigh, the report’s authors. “The natural resource with no substitute, water use is escalating at an alarming rate from population growth and industrial expansion.

At the same time, the world’s freshwater supply is shrinking due to pollution and the draining of underground aquifers.”

Goldman breaks the $365 billion global water market down into 10 distinct sub-sectors as follows:

Water and wastewater treatment $138 billlion (US = $24 billion)
Industrial water treatment $80 billion (US = $22 billion)
Infrastructure $40 billion (US = $12 billion)
Valves $40 billion (US = $6 billion)
Pumps $25 billion (US = $6 billion)
Other water-related $20 billion (US = $8 billion)
Residential $18 billlion (US = $6 billion)
Water test $4 billion (US = $2 billion)

The overall growth rate is projected to be 4%-6% in developed countries and 10%-15% in developing countries, with China “positioned for a sustainable 20%-plus growth opportunity over the next several years”.

This optimism about growth rates in developing countries reflects the fact that the European water utilities that suffered sorely as a result of over-inflated expectations about the developing world are not covered in the report. Instead the focus is on the US industrial groups that have entered the water sector. “The number of water pure-plays is steadily evaporating. We expect further global consolidation across the various water sub-sectors and consider the best positioned companies to be GE, Danaher, ITT Industries, Siemens and Pentair,” the authors say.

Water treatment chemicals company Nalco, which is partly owned by Goldman Sachs’ private equity arm, gets a particularly positive write-up in the industrial water treatment section.

One of the most interesting parts of the 76-page research note is the analysis of valuation in the sector. The report argues against using a single multiple for valuations, suggesting instead a range of price earnings ratios depending on the type of company: pumps 16x-17x; valves 17x; automation 20x; treatment 22x; test 22x; filtration 23+x; UV
24x; desalination 26x.