A Major Player In The World Water Business

By Eric Fox | January 14, 2010 AAA

Cascal N.V. (NYSE:HOO) is a fallen initial public offering (IPO) from early 2008, trading at a little more than half its IPO price of $12 per share. The company provides water and wastewater treatment services, and has a stable core base of operations in the United Kingdom, complemented by growing revenues in higher growth emerging markets around the world.
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Core Operations
The largest part of the company's business is in the U.K., which was 51% of revenues in fiscal 2009.

Cascal's operations in the U.K. are heavily regulated and subject to rate reviews by the Water Services Regulation Authority, which determines water rates for England and Wales. This regulatory body just granted the company's water subsidiary a rate increase of 4% and 2.1% in 2010 and 2011, respectively. This is a real rate increase and will be added to the inflation rate index. (For related reading, check out Trust In Utilities.)

The rate determination for 2012, 2013 and 2014 are a little less generous for the company, at -0.5%, -0.8% and +0.2%, respectively. It also required a capital investment of 44 million pounds over the next five years, less than the 2005 to 2010 requirement.

Emerging Markets
Cascal's other operations are located in higher growth emerging markets, the three largest of which are China, South Africa and Indonesia. The company reported a compound annual growth rate in revenues the last three years in these countries of 63.8%, 35.4% and 15.1%, respectively. Cascal plans to continue this expansion at a rate of one to two new projects per year. (For more, check out Forging Frontier Markets.)

U.S. Markets
One hole in Cascal's operations is the absence of any businesses in the United States, which may motivate the company to acquire an existing operation in this country. Adrian White, the Chairman of Cascal, hinted at this in a recent press release where he said he wanted to "rapidly broaden our core capabilities and build additional global momentum."

There are several water utilities that trade publicly that might prove attractive to the company if it can get its stock price back up.

Connecticut Water Service, Inc. (Nasdaq:CTWS) provides water services all over Connecticut and also has a real estate segment.

Middlesex Water Company (Nasdaq:MSEX) provides water services to customers in Delaware, Pennsylvania and New Jersey.

SJW Corp (NYSE:SJW) serves water customers in California and Texas and also has holdings of land and commercial real estate across the U.S.

York Water Company (Nasdaq:YORW) - This water company serves approximately 200,000 customers in two counties in Pennsylvania. York Water Company has been in business since 1816 and has paid dividends for an incredible 556 consecutive quarters, or 193 years.

Bottom Line
Investors in Cascal get a stable base of revenues from the heavily regulated operations in the U.K. and also participate in the rapid growth of the emerging economies due to the company's rapid expansion into these areas. (For related reading, check out Your Dividend Payout: Can You Count On It?)

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