The Water Era
From 2002 – 2003, local stock market has a new theme - “water world”. Many water/waste treatment companies rushed into the SGX. These stocks were hot and many of their prices surged more than 100% during first day of listing. Similar to the dot.com era which I was not involved (I left the stock market temporary due to losses incurred in 1999 small bull), I was skeptical about these water companies and their high PE. The (same) question is - how many of these water/waste treatment companies are really going to make big bucks? I did not buy any of them although I applied for their IPO but didn’t get it. And as expected, few years down the road, only one company met and exceeded investors’ expectation. This is none other than Ms Olivia Lum’s Hyflux. The rest of them produced disappointing results and thus all their share prices fell into penny stock. It was only recently that this water issue revived with company such as Dayen started to produce some results (detail not available here since I never study on Dayen) plus many hot China water/waste treatment companies listed on the SGX.
I hardly study/monitor water/waste management company. This is because for those who are performing, their share prices are expensive. On the contrary, those that failed to meet investors’ expectation, their share prices are terribly cheap and stagnant. Last night, while browsing through all the listed companies, I suddenly noticed that EcoWise’s share price has surge above $0.80. I remembered that EcoWise was a penny stock and at one time worth less than 10 cents. I had been reading SGX announcement daily but I am not aware of any extraordinary news on EcoWise. I really have no clue what supported such high share price. I know the company is giving out 3 cents interim dividend, issuing rights and warrants, but these actions is insufficient to explain such high share price. I had also browsed through its interim report. Really, there is nothing to shout about. From my data source, EcoWise share price surged strongly in June/July 2007. Anyway, what really interest me is not EcoWise but Darco Water.
Darco Water – A Hidden Gems?
I also found that Darco Water share price surged to nearly 40 cents a share. Again the first question I asked is “what cause the share price to surge”? So I glanced through Darco Water’s recent announcements and I found something. It may be late but then it’s worth the effort to study in detail. Firstly, Darco Water released some significant news recently.
1) 5 Jul – Darco Water’s subsidiaries secured various projects amounting to S$11m.
2) 13 Aug – released of interim report showing improved performance (see below).
3) 24 Aug - Darco Water’s subsidiaries secured various projects amounting to S$8m.
4) 10 Sep – Darco Engineering signed MoU with the Supreme Council for the Environment and Natural Reserves, Qatar, to form a joint venture (JV).
5) 11 Sep – Darco Water secured S$40m financing from UK-based fund.
6) 26 Sep – Darco Water secured S$130m water purification projects in Pangkalpinang City, Indonesia
Although the first three announcements are important, it is no big deal. But the last three announcements caught my attention. Let’s go into the detail. Darco Water’s subsidiary has signed an MoU with Qatar government agency to set up a JV to resolve Qatar’s water and waste issues. If Darco Water finally concluded such JV, this would mean two things: 1) a significant project; 2) an important step into Middle East countries.
Next, Darco Water obtained financing from a UK investment company, “Pacific Capital Investment Management”. Darco Water will issue S$40m zero-coupon bonds to Pacific Capital. The investment company will have the option but not obligation to convert the bonds into equity. I agree that this is a vote of confidence from UK investment company on Darco Water’s future.
Then we have Darco Water’s subsidiary securing an agreement to upgrade and operate a water treatment plant with the local government of Bangka Island, Indonesia. The contract valued at approximately S$130.8m. After the upgrading, Darco Water will form a JV with the municipal water authority to operate the plant for next 20 years. You know what this means? RECURRENT INCOME!!!
In my opinion, these announcements, especially the last three serves as a basis for share price adjustment. Looking at these news, I am excited even though Darco Water’s share price is nearly 40 cents a share. This is because the fundamental has changed! Besides, I feel that current price may not be excessive. I am sure many people have regretted for locking-in profit on Hyflux when its share price surged to a dollar; it surged above five dollars subsequently. We must look at the fundamental, not just the share price. So the next thing I need to do is to determine whether current share price has taken into account all these good news. In addition, and as usual, to study Darco Water’s recent years' performance.
Financial Analysis
The following table shows Darco Water’s financial health and performance since 2004. As usual, I just punched in the figures and my Excel will do the calculation.
From 2002 – 2003, local stock market has a new theme - “water world”. Many water/waste treatment companies rushed into the SGX. These stocks were hot and many of their prices surged more than 100% during first day of listing. Similar to the dot.com era which I was not involved (I left the stock market temporary due to losses incurred in 1999 small bull), I was skeptical about these water companies and their high PE. The (same) question is - how many of these water/waste treatment companies are really going to make big bucks? I did not buy any of them although I applied for their IPO but didn’t get it. And as expected, few years down the road, only one company met and exceeded investors’ expectation. This is none other than Ms Olivia Lum’s Hyflux. The rest of them produced disappointing results and thus all their share prices fell into penny stock. It was only recently that this water issue revived with company such as Dayen started to produce some results (detail not available here since I never study on Dayen) plus many hot China water/waste treatment companies listed on the SGX.
I hardly study/monitor water/waste management company. This is because for those who are performing, their share prices are expensive. On the contrary, those that failed to meet investors’ expectation, their share prices are terribly cheap and stagnant. Last night, while browsing through all the listed companies, I suddenly noticed that EcoWise’s share price has surge above $0.80. I remembered that EcoWise was a penny stock and at one time worth less than 10 cents. I had been reading SGX announcement daily but I am not aware of any extraordinary news on EcoWise. I really have no clue what supported such high share price. I know the company is giving out 3 cents interim dividend, issuing rights and warrants, but these actions is insufficient to explain such high share price. I had also browsed through its interim report. Really, there is nothing to shout about. From my data source, EcoWise share price surged strongly in June/July 2007. Anyway, what really interest me is not EcoWise but Darco Water.
Darco Water – A Hidden Gems?
I also found that Darco Water share price surged to nearly 40 cents a share. Again the first question I asked is “what cause the share price to surge”? So I glanced through Darco Water’s recent announcements and I found something. It may be late but then it’s worth the effort to study in detail. Firstly, Darco Water released some significant news recently.
1) 5 Jul – Darco Water’s subsidiaries secured various projects amounting to S$11m.
2) 13 Aug – released of interim report showing improved performance (see below).
3) 24 Aug - Darco Water’s subsidiaries secured various projects amounting to S$8m.
4) 10 Sep – Darco Engineering signed MoU with the Supreme Council for the Environment and Natural Reserves, Qatar, to form a joint venture (JV).
5) 11 Sep – Darco Water secured S$40m financing from UK-based fund.
6) 26 Sep – Darco Water secured S$130m water purification projects in Pangkalpinang City, Indonesia
Although the first three announcements are important, it is no big deal. But the last three announcements caught my attention. Let’s go into the detail. Darco Water’s subsidiary has signed an MoU with Qatar government agency to set up a JV to resolve Qatar’s water and waste issues. If Darco Water finally concluded such JV, this would mean two things: 1) a significant project; 2) an important step into Middle East countries.
Next, Darco Water obtained financing from a UK investment company, “Pacific Capital Investment Management”. Darco Water will issue S$40m zero-coupon bonds to Pacific Capital. The investment company will have the option but not obligation to convert the bonds into equity. I agree that this is a vote of confidence from UK investment company on Darco Water’s future.
Then we have Darco Water’s subsidiary securing an agreement to upgrade and operate a water treatment plant with the local government of Bangka Island, Indonesia. The contract valued at approximately S$130.8m. After the upgrading, Darco Water will form a JV with the municipal water authority to operate the plant for next 20 years. You know what this means? RECURRENT INCOME!!!
In my opinion, these announcements, especially the last three serves as a basis for share price adjustment. Looking at these news, I am excited even though Darco Water’s share price is nearly 40 cents a share. This is because the fundamental has changed! Besides, I feel that current price may not be excessive. I am sure many people have regretted for locking-in profit on Hyflux when its share price surged to a dollar; it surged above five dollars subsequently. We must look at the fundamental, not just the share price. So the next thing I need to do is to determine whether current share price has taken into account all these good news. In addition, and as usual, to study Darco Water’s recent years' performance.
Financial Analysis
The following table shows Darco Water’s financial health and performance since 2004. As usual, I just punched in the figures and my Excel will do the calculation.
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Revenue – since 2004, Darco water’s revenue has been growing at approximately 16.6% a year. Unfortunately, the net profit has been fluctuating. Consequently, the company’s profit margin and Returns on Equity (ROE) have also been fluctuating. With the exception of 2005, company’s ROE has not been attractive. The ROE for 2006 was only a pathetic 4.9%. My annual returns is more than 10%.Liquidity and cash – company’s current ratio is acceptable consider that it is not an asset-heavy company. Company’s cash and cash equivalent has increased significantly mainly due to debt financing. Cash generated from operations is rather disappointing. The cash per share stands at $0.16 for the year ended 2006.
Debt - gearing topped to 31.6%. Personally, I do not consider current gearing as excessive but Darco Water really needs to translate all these projects into good profit such that high loans are justified by high profit especially the ROE. These debts will cost company above 5% interest. I would expect to see company earning ROE of above 10%.
Price – based on Darco Water’s interim report and current share price of $0.375, Darco Water currently trades at 29 times PE. This is relatively high unless we ascertained/assessd/analysed that Darco Water growth momentum is highly likely.
Yield – for a growth company, yield is not important. A growth company should in fact pump all its earnings back into business operations instead of giving it out to the shareholders. Of course, the important question is whether Darco Water is a growth stock for next few years.
Share issued – Darco Water currently has less than 200m share issued. Generally, for small and mid capitalization companies (listed on the SGX), the share issue ranges between 500m – 1b. The impact on low share issue is that firstly, Darco Water can and should issue more shares. Secondly, if Darco Water indeed reported profit growth, its shares will be “cornered”. But for fundamental investors, we can ignore this.
Price Analysis
I had collected Darco Water’ daily trading data from 26 Jun to end Sep 2007. The following is the price and volume movement.
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From the chart, the dotted-circle line represent those announcements. You can see that current share price hardly takes into account all these announcements! The first announcement was made on 5 Jul but Darco Water’s share price hardly surge since July. It still hovers around $0.35 - $0.40! I believe that this was due to US subprime problem which dampened market sentiment. If I am correct, that means Mr. Market is wrong. He overlooked Darco Water’s potential by being temperamental.
If you look at the chart carefully, you will notice that Darco Water’s trading volume increased before the announcement on Qatar’s MoU. It looks like some people already knew and started to accumulate the stock. I hope that it is not insider trading.
Conclusion
In my opinion, Darco Water’s management has been aggressive in sourcing for more business projects and has been exploring new territory. Its previous financial performance is unexcited but nonetheless, financially healthy. The new project in Indonesia is exciting and the possible business opportunity in Qatar is double exciting. Should this materialized, Darco Water’s share price will surge further, all else remains contant. Notwithstanding the positive outlook, I am still worry about rising oil price and US subprime problem. As such, I will purchase a small quantity in Darco Water in hope that all these projects will be translated into profit growth. And if the stock markets really clashed, I will have the capability to average down Darco Water. At the end, what’s really important is whether if Darco Water’s management is able to form a JV in Qatar, secure more big projects and whether these projects will be translated into sustainable profit growth.
