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Clay Carter, Global Investment Specialist is the man behind the Macrovue Vues.  Using his extensive research knowledge and expertise Clay selects up to 10 global companies making it easier for investors to turn global megatrends into tangible investments.  This week Vue in review is the Macrovue Water, Liquid, Gold.

The Water Liquid Gold share portfolio is a concentrated portfolio of ten shares comprising companies at the forefront of the fight against global water scarcity. 

Clay says “Over the past 12 months* the Water – Liquid Gold Vue generated a return of +55.93%,  an excellent return in comparison to the ASX which was +18.38% and the MSCI All Country World Index +24.3% during the same period.  We saw strong performance across the board, with most of the stocks outperforming industry peers significantly”.   

Source: Bloomberg. *Figures are for period 1 Jan 2019 to 31 Dec 2019.  Returns are in Australian Dollars and follow a daily compounding frequency. Returns incorporate asset price changes, dividends, income and currency fluctuations. Other fees, charges, taxes and costs have not been considered.



Clay’s company Insights into what is potentially driving strong performance for the Water Liquid Gold Vue. 

  1. Companhia de Saneamento Basico do Estado de Sao Paulo (SABESP) ADR (NYSE: SBS)

Sabesp is one of the world’s largest water and sewage service providers serving residential, commercial and industrial consumers spread across more than 360 municipalities of Sao Paolo.  The stock had a great rally in 2019 from its lows in November 2018. The year began with a positive catalyst driven by election of pro-reform candidate Jair Bolsonaro as President.   Given his agenda to turn around the Brazilian economy by fighting corruption, pursuing deregulation as well as privatization of state-run firms, the stock rallied significantly. In 2019, SBS stock appreciated steadily underpinned by robust earnings growth.

In the most recently reported, a stellar 3Q 2019 earnings beating street estimates.  Net operating revenues grew by +42% Year-on-Year reaching R$ 5,410.6 mn. The adjusted EBITDA reached R$ 3,009.3 mn, up +109.8% from the R$ 1,434.6 mn in 3Q 2018.   Consequently, EBITDA margins expanded to 55.6% in 3Q 2019 from 37.6% the year prior. Net Income in the quarter came in at R$ 1,208.9 mn, growing +113.9% from R$ 565.2 mn in 3Q 2018. There were some operational tailwinds leading to increase in total build volume by +2.8% (+3.8% including Guarulhos and Santo André).

A big driver for top line in the quarter was signing of the agreement with the municipality of São Paulo to provide sanitation services directly to the agencies.   Another positive for the bottom line was a 25% reduction in wages and pension benefit obligations, primarily driven by reversal of a provision related to an agreement signed with the Public Prosecutor Office of São Paulo for gradual dismissal of retired employees. On the flip side, the depreciation of the Real relative to USD and JPY hurt significantly in terms of interest expense on the outstanding foreign currency denominated debt (~49% of total debt).

  1. Entegris Inc. (NASDAQ: ENTG)

Entegris is a specialty materials company which offers solutions for semiconductor and high-tech industries. In particular, relevance to our theme here is in the context of its Microcontamination Control business, which provides liquid filters and purifiers used in water treatment and desalination plants. Company recently reported 3Q 2019 earnings, which were a bit of a mixed bag, although the company did meet previous guidance for the quarter. Sales were up 4% sequentially, but down margially -1.1% YoY. Although gross margins declined, disciplined cost management and recent reorganisation enabled Entegris to expand EBITDA margins to 27%. In September Entegris acquired Hangzhow Anow Microfiltration to add new membrane technology and liquid filtration products to its portfolio, and more critically to add manufacturing capabilities in China.

Management is quite bullish on the opportunity ahead. With the proliferation of IoT devices (forecast to reach 75 bn installed IoT devices by 2025, Source: Statistica) and widespread applications across many areas like EVs, industrial automation, VR/AR and 5G there is a need for smaller and more powerful chips. A key enabler to that is precision materials manufacturing advances featuring higher materials intensity and higher purity. Entegris is well positioned to capitalise on this growth opportunity, and management is confident of achieving growth of 200-300 bps more than industry growth (wafer starts growth forecast to be 2x GDP growth over the next 3-5 years). Specifically, within the Microcontamination Control business, management is confident of growing market share (expecting to grow 200-400 bps faster than industry) and achieve operating margins of some 33-35%.

  1. Itron Inc. (NASDAQ: ITRI)

Itron reported a decent quarter for 3Q 2019 in Sep 2019. Revenues for the quarter reached US$624.5 mn, up 5% YoY (7% YoY on a constant currency basis) driven by strength in their North America Networked solutions business (up +12% YoY in CC basis). Gross margins compressed 160 bps however, primarily due to higher warranty expenses. Operating profit came in at US39.4 mn (-5% YoY) while earnings per share was US$0.42 per share (-16% YoY). Unfavourable product mix & increased warranty costs in device solutions and networked solutions were the primary drivers, along with FX headwinds, of compression in operating margins. The 3Q 2019 backlog reported gives confidence for a strong demand – reported bookings for the quarter was US$609 mn. 12-month backlog of US$1.4 bn and total backlog of US$3.1 bn have remained stable.



Important information

This information is by Macrovue Limited (ABN 98 600 022 679, AFSL 484264). Please read our Financial Services Guide which contains information about us and the financial services we provide. The information in this email has been prepared without taking into account your objectives, financial situation or needs. For this reason, you should consider the appropriateness of the advice in light of your own objectives, financial situation or needs before acting on the advice in this email.

Past performance is not a reliable indicator of future performance. Investment in securities involves risk. Share prices rise and fall. The payment of dividends and the return of capital are not guaranteed. Investing in overseas markets exposes you to additional risks including those related to movements in foreign currency exchange rates.

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