HYDRO, the upbeat company visit.
HYDRO is thje leading water environmental engineering firm on a high growth path for this and next year and beyond!
HYDRO (8.75) is a latest model portfolio selection which has already moved up by some 20% -but which in my view and based on a company visit last week, remains firmly on my buy view list. I first favorably mentioned HYDRO in our member lounger at the price of 6.70, on August 29.
The main reason being that HYDRO is a leader in a high growth and desirable business which has nothing to do with Thai consumer, exports/tourism and the ongoing EU/USA malaise. Here is yet another Thai engineering firm which I have stated before are attractive.
You can see their web site at this link to familiarize yourself with this high growth company.
http://www.hydrotek.co.th/index.php?lang=en
Its main business is as described:
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The company was IPO’d last December 11 at 3.39 Baht per share however it was founded in 1982 -and so has long experience in what it does. Its aim is to not only be the leader in Thailand (it is already), but also to be a significant player in its field in the 11 counties within AEC. For example in Thailand, a huge 2.4 Billion Baht project is currently being developed in Chiang Mai which will contribute to generate good revenues for the next 30 years. A new project is in process with listed company TPC, on recycled Waste Water. HYDRO has currently a mix of 49% private and 51% government revenues. You can see some of the projects it undertook at their web site.
The company projects 1 Billion Baht of revenues for this year and 1.3 Bill.,for year 2013. Hence there will be a nice catch up for the second half.
Its net profit margin is 7% which the CEO claims will be maintained and perhaps even a bit higher. HYDRO’s backlog is 3.4 Bill. Baht but its excited to nail a huge project in Myanmar, to be announced “before the end of this year”. This company is on a high growth path now with likely projects coming -besides Thailand- for Laos, Cambodia and Indonesia. On recycled waste water it will be able use much of the waste for bio gas, so to produce electricity to run all or part of the purification systems.
HYDRO employs 120 workers and 60 engineers of all 4 kinds. It has long expertise in what it does and so is the leader. There are competitors but as I understand it: no other firm can offer the total broad range of services it can. Interesting again how a Thai small cap is the leader in such desirable growth industry which has such huge visible potential.
When asked what are the biggest challenges the firm told me: how to finance their high expected growth path into next year and beyond. HYDRO has a D/E ratio of only 1.1 and no long term debt and so ample room to leverage more, to take advantage of the many water purification business opportunities presented. I told the company to consider warrants which I would not price too deep in the money.
At the 7% stated net project margin, I can easily see 70 mill. Baht net profit this year and 91 mill. Baht for next year. Since the firm has 130 mill. shares outstanding, this comes to 0.54 Baht per share for 2012 -and 0.70 Baht next year. At the current share price of 8.75 Baht, the year 2012 p/e is 16.2 but dropping to only 12.5 for next year. I think this is modest as HYDRO is on a very high growth path in a desirable/visible noncyclical high growth business.
HYDRO also has a policy of paying-out 70% of its earnings, in cash dividends. So the dividend should be 0.37 Baht for this year and increasing to 0.49 for calendar year 2013 operation. Or on the current stock price, 4.2% yield for this years’ operations and then increasing to 5.6% for year 2013 results. For last year, the company paid a 0.26 dividend on May 4th 2012. I can see the yearly dividend growth rate should exceed 35% per annum for some years to come.
The stock price increased nearly 5% on Friday as the HYDRO gave presentations to other Thai value investor all during the day last Friday, just before we met at 17:30 PM.
While HYDRO’s stock price is flirting with an all time high, my impression remains very favorable as I can see earnings explosion for some years to come along with a far above average growing dividend yield –being a leader in a business well removed from global troubles, just like DEMCO.
Best Regards,
Paul Renaud.
