Who is HOO? The Arbitrage of Yahoo! Finance & Predator Trading

While the latest rave is the FOMC meeting and its “language” [I fondly remember the time when Greenspan was still our beloved federal reserve chairman and CNBC spent a 15 minute segment going over what was truly behind the implications of the word “but” in a sentence muttered by the former fed chair], investors must be focused on opportunities that tend to be abound during times of crisis.

Law of the Jungle: For the Powerful Trader [you] reading this---Be the Predator

In hindsight, now is the time to not invest:

1. Now is the time to research, dig deeper, and create the best hit list ever of companies you will buy. [Select your unsuspecting herd of gazelles.]
2. Pyramid into your positions slowly and profitably with target price points. The reason for this is the infinite characteristic of time delay in the markets. [Observe the prey. Poach carefully. Play the situation in your head. Have an exit strategy.]
3. In times of uncertainty and deterioration in the exchanges, investors have this unique and rare moment of reprieve from chasing the hottest stocks to finally sit down, real time, and focus on opportunities. [As with nature and markets; the gazelles noticed a secondary predator—fearing that the fundamentals of the herd are at risk—the herd goes astray. However, in the midst of this storm of dust, you (the predator), notice three adolescent gazelles, out of breath, inexperienced, spooked…coming your way…chance is on your side…nature is rooting for you…]
4. In times of chaos—there is actually less noise to distract you and the potential lure of thought of “I need to buy ___ to play catch up to other investor returns” that captures most investors, need not apply in such an environment. For such chaos, the thinking ought to be “I will buy you when I am ready.” [Your pupils dilate; you sense the earth more as the dirt finds its way between your toes; you breathe in a rhythm—envisioning the chase that lies before you; you raise your knees---feeling gravity in motion and the adhesive quality of damp dirt that finds its way to stick to your thighs as you raise yourself gently; unconscious instincts sweep over conscious fear---you notice weak spots in the prey; teeth grinds; fore arms tighten; wrist firms; shoulders slightly raised------and you attack—with fierce grace….you are a predator…]

Applying Predator Trading to Cascal N.V. (HOO): Who and How

Investors must realize that the database for stocks is quite large. There is the influx of IPO’s, the buyouts, the segmentation of stocks according to endless arrays of possible characteristics [i.e. market capitalization, volume, 52 week highs etc.]. Due to this data grouping that occurs---naturally---mistakes are borne. Nothing is ever perfect—and as traders—we rely on imperfection to survive. It is through the lack of persistence and effort by the opponent that we may sometimes get that slight, favorable edge. Such times are rare—but they do exist for those willing to dig deeper and to screen harder.

For Yahoo! Finance, such as time occurs when the database incorrectly groups a company under the wrong market capitalization, industry or worse—it forgets to update the stock’s progress. For the times that I have been able to discern such a momentous occasion, the trade tends to prove profitable. Why? The answer is simple ---no one is looking at the stock because it has been buried deep in another dimension and failed to be correctly identified by the automatic screens; and there lies the arbitrage.

What is Cascal N.V.?

Cascal N.V., together with its subsidiaries, provides water and wastewater services to homes and businesses in the United Kingdom, South Africa, Indonesia, China, Chile, Panama, and the Philippines. The company's water projects involve the collection of raw water from surface and groundwater sources, treating the water to meet the required quality standards, and then supplying the treated water through a distribution network to customers' premises. Cascal's wastewater projects involve the collection of wastewater from customers' premises, treating the wastewater, and returning the treated water to the environment.

Cascal invests in and operates water and wastewater facilities worldwide. The company has experience working in eight countries across four continents where its mission is to deliver high quality water and wastewater services.

The most interesting fact about HOO is that it is a first pure play [at least to my knowledge] in water services on an international scope. Most utility companies—public ones—to invest in are mostly domestic utility companies, who do other books of business. The key form of a pure play, is that management has 100% focus on the core business. There is nothing to divert the company’s interest nor sidetrack key decisions. The following links provides images on the business of water:
http://water.org/FileUploads/MapWaterAccess.pdf
http://water.org/FileUploads/MapSanAccess.pdf

For most undeveloped countries and growing countries--water assets are often poorly maintained and as a consequence perform inefficiently. Whether it is pipes that leak, pumps that are worn or processes that are not optimized, Cascal specializes in improving the performance of existing assets, introducing new technologies and reducing operating costs.

The Company has operations in 7 countries; UK, Chile, South Africa, Indonesia, Philippines, Panama & China.

Firm Operation in-depth details can be found here.

The company does operate on a different schedule have reported their latest annual result on Tuesday, June 17th.

1. Year over year EBITDA change from continuing operations were up a healthy 17% to $61.8 MM, while revenues changed yearly to + 33% to $157.8 MM.
2. Revenue from UK increased 25%, South Africa by 57%, and China by $7.1 MM due to the inclusion of only four and a half months of activity—they recently expanded into China with an acquisition.

The company has delivered strong organic growth and implemented a very successful acquisition strategy. Management’s approach is to position Cascal to continue to benefit from positive population growth trends, which in turn allows the firm to provide the necessary services to facilitate access to an increasingly scarce resource. Cascal’s business model is resilient to potential global economic slowdowns.

For the year ended March 31, 2008, net profit was $11.6 million, or $0.49 per share, compared to net profit of $8.0 million, or $0.37 per share for the same period in 2007. For the year, net profit from continuing operations was $9.9 million, or $0.42 per share, compared to $7.7 million, or $0.36 per share, during the same period last year.

For HOO, population trends prove to be a very bullish aspect of demand for its services, as only 26-50% of the population in China has access to improved sanitation of water. China also remains the fastest growing segment of the business—and has done well to expand it well—as there are about 1,329,998,764 people in China to date.

Cascal also uses a very disciplined approach to the selection of projects. HOO looks to set up projects in areas that our research shows there are both significant current need and high population growth. For example, HOO currently provides water services to customers in Batam Island which is a rapidly developing island, leveraging its proximity to Singapore to drive industrial growth. Most recently, the 50% joint venture has committed an initial $6 million investment to construct a new water treatment plant on Batam Island. The new water treatment plant is expected to commence operations in April 2009, and will serve the growing demand for our services.

Key Points of Focus:

1. 45% of sales of HOO are in high growth economies. In addition, expect to see strong sales growth and margin expansion on its recently acquired Chinese assets over the next few years. [*note: future tax rate is to be 45% compared to previous 33%. This should be included as your tax rate for your own analysis if you are doing unlevered cash flow projections.]
2. Management expects half of top line growth to come from existing operations, and half from new projects. A good showing of new projects is the recent Chile Operation, which is in the final stages of negotiations; expected to generate $6 million in revenues on an annual basis with EBIDTA above 40%.
   Catalyst: HOO is bidding on a Hong Kong project in the coming months, a project in Latin America, which would be a $10 million dollar investment and generate $15 million per year in revenues as well as water and wastewater concession projects in Eastern Europe serving 230,000 people.
3. New and exiting projects have high EBIDTA margins of 30% +. As projects and operations begin to ramp up, high cash flow will be the direct result.

Bottom Line: HOO is a pure play in water, but at the same time, provides long term value in becoming apart of your portfolio. As countries such as China begin to develop their economics—the focus on infrastructure development will be of great importance. Especially in this time, where corporate results are ambiguous—I always prefer organizations that provide a service that is directly associated with a required demand that ensures the function of life. In this case—water is a natural source of demand.

The Trade: HOO has been oscillating at or around its IPO price. I would let the price build and wait until it manages to close above $14 a share, and pyramid your position in slowly over time.
 

Comments

[J-Peezy]

all in!

[D-Dub]

i've already went all in on your last pick...man i'm gonna have to go rob a bank for some mo' CA$H...