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Coverage Initiation: Consolidated Water Co.
Value Line has initiated coverage of Consolidated Water Co. (CWCO) in its flagship product, The Value Line Investment Survey. Consolidated Water designs, builds, operates, and (in some cases) finances water desalination plants, using seawater reverse osmosis (SWRO), and water distribution systems in island countries. The company is headquartered in Grand Cayman, the largest of the Cayman Islands. It has operations there, in the Bahamas (Nassau and Bimini), in Belize (Ambergris Caye), in the British Virgin Islands (Tortola and Jost Van Dyke), and in Indonesia (Bali). Consolidated Water operates 14 desalination plants in these five countries, with a total capacity of 25.9 million gallons a day, and has more than 5,500 water utility customers in Grand Cayman.
Consolidated Water was established in 1973 as a private water utility in Grand Cayman. It obtained its first public utility license in the Cayman Islands in 1979. The company installed its first SWRO plant in 1989. It had its initial public offering on NASDAQ in May of 1995.
The company’s water production and distribution business model was introduced in the Cayman Islands in 1990, and is now used throughout Consolidated Water’s operations. The company serves a region where natural freshwater supplies are limited or nonexistent, hence the need for desalination. It has entered other countries either through acquisition or by supplying desalination plants. Consolidated Water signs long-term contracts (up to 23 years) with government-owned utilities. The agreements include hedges for energy and operating costs.
Although Consolidated Water is included among the stocks covered in the Water Utility Industry, it is not just a utility. In 2012, the company received 62% of its revenues from bulk water operations (i.e., supplying water to government-owned distributors); 37% from water utility operations, and 1% from engineering and management services. The water utility segment is the most profitable, having produced 52% of gross profits in 2012. The balance sheet is sound, with long-term debt making up just 3% of total capital as of September 30, 2013. However, earnings have been inconsistent since 2008. The stock price rose more than 90% in 2013, but this issue hasn’t performed well over a five-year span.
Consolidated Water’s growth strategy is focused on new markets, expanding in the Cayman Islands and the Bahamas, and offering complementary services, such as wastewater management. Management has an eye on San Diego, California and Tijuana, Mexico. Consolidated Water is proposing to take a minority stake in a $600 million desalination plant in Mexico. The company has a pilot project there. Management believes that any place that needs potable water is a potential market.
Consolidated Water pays a modest annual dividend of $0.30 a share, which hasn’t been increased since 2009. The dividend yield is slightly above 2%, making the stock of moderate interest to income-oriented accounts. A dividend reinvestment program is available. Investors should be aware that the stock is thinly traded.
Among the risks the company faces, its exclusive utility license for the main tourism and residential areas of Grand Cayman is subject to renewal. Consolidated Water has the right of first refusal if the government offers a license to another company, but the terms might not be as favorable as those under which Consolidated Water now operates. When the company’s operating agreements in other countries expire, there is no assurance that they will be renewed. Or if they are renewed, the new agreements might not be as lucrative for Consolidated Water.
For a more thorough look at Consolidated Water, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have a position in the stock mentioned.