“The World’s Best Business Model: Selling Water to a Thirsty World” Roger Conrad

By Travis Johnson, Stock Gumshoe, April 1, 2008

This one comes in from Roger Conrad in an ad for his Vital Resource Investor, and it touts two water stocks that are available on one of their “special reports” — in this case, the report is called, “The World’s Best Business Model: Selling Water to a Thirsty World.”

The general idea is probably one you’re quite familiar with — people have been talking about investing in water for quite some time, since it’s obvious that this is the one “commodity” where the demand is truly forever and inelastic, and clean potable water is getting harder to find in many parts of the world.

According to the ad,

“Water is a perfect business model. Demand never drops, people will pay almost anything to get it, and the stuff falls out of the sky for free. Once you build your distribution mechanism, you’re home free. Rising water prices will make fortunes for investors who position themselves now to profit from the impending shortage. The best way to profit isn’t with your garden-variety water utilities. Most of these are not really water companies at all but energy empires with small water divisions that give you no big upside.

“We’re going with forward-thinking water-technology outfits that have set themselves up for years of profits in cleaning, treating and actually creating ‘blue gold.'”

Then they go on to tease two different water companies.

The first one is described as …

“a little-known R&D outfit that has created a device that generates drinking water from wastewater. It has also just signed a deal to build a huge seawater desalination plant in drought-ridden Algeria. Now trading for less than $2.50 a share, it could easily jump past $10 in the next few years.”

It’s a Singapore-based company. And that’s about all we get, clue-wise. So do we resign ourselves to subscribing to this newsletter for $299 to find out the name of the stock?

Don’t be silly.

The mighty Thinkolator is ready for the challenge, and your friendly neighborhood Stock Gumshoe will provide … this stock is almost certainly …

Hyflux (600 in Singapore, HYFXF on the US Pink Sheets)

This is an R&D company, with focus on membranes, and particularly on water treatment membranes (they also develop membranes for energy and industrial uses, and they’re working with new and alternative renewable resources like lactic acid). Hyflux trades with a little bit of volume on the pink sheets for US investors, about $100,000 worth trades daily according to Yahoo Finance. They also fairly recently launced the Hyflux Water Trust, which is a water infrastructure investment trust that is expected to own many of the projects that Hyflux builds and to be an income producer, but that trust barely trades so far, and doesn’t trade at all on the pink sheets as far as I can tell. Haven’t looked into the trust very deeply yet.

HYFXF is trading below $2.50 a share, but it’s a big company, near $3 billion market cap, even if those are Singapore dollars (the Singapore dollar is about .72 US) — it’s part of the Singapore index, so you’ll pick up a bit if you buy the index ETF, too. It has been a highflier before, as the top performer in Singapore back in 2001 or so, and the recent peak has been just above $2.50 (it’s at 2.24 on the pink sheets as of the yesterday, a bit over three Singapore dollars on it’s home exchange).

They really are working on water recycling technologies, they are profitable, they have a small but growing dividend (they aim to dividend out 15% of earnings), but the earnings have been quite volatile. They’ve gotten a lot of business from China in recent years, and I suppose that’s likely to be their strongest growth area given the water and sewage problems we all hear about in that country.

Is it worth it? Dunno. It ain’t cheap — PE is about 50, growth in the recent quarter was close to 100%. The dividend is about 1%. Whaddya think?

Moving on — there was another water company, too, remember?

“This behemoth has been snapping up tiny municipal water suppliers by the dozen and is building an H20 empire that will become hugely valuable as wa