Tuesday 10th December 2019 marks the date when Australia’s most populous city faces a further increase in Water Restrictions (Level 2), the harshest water use rules facing the population in over a decade. Sydney’s dam levels have dropped to 45% and the NSW Water Minister was quoted as saying this week the restrictions were brought forward “because the size and scale of the drop of water into Sydney was unlike anything we’ve ever seen before”.
United Nation’s Sustainable Development Goal (SDG) 6, aimed at ensuring availability and sustainable management of water and sanitation for all, has increased the focus of companies, stakeholders, regulators and the investment community around the opportunities and challenges that water scarcity creates. The impacts of the current drought are increasingly well documented in rural Australia and the likes of the events in Cape Town in 2018 where the city was close to “Day 0” are becoming common place in daily media reports. The UN estimates 40% of the global population are impacted in some way by water scarcity, furthermore, demand for water is expected to increase by 55% in the period from 2000 to 2050.
It is very common for all of us to be aware of the challenges and threats that an issue of this magnitude presents however there are also companies that may be able to present solutions or remedies. It is in this vein that we wanted to highlight GWA Group (GWA.ASX), being one company the Ethical Partners Investment team feels is well placed to help the consumer grapple with the decreasing supply of and the likely increasing cost of water. GWA is a leading designer and supplier of Bathroom and Kitchen (B&K) products and technology, its most recognised brands include Caroma and Methven. GWA holds a significant market share position across new build, commercial and DIY segments of the B&K market in Australia and NZ and has been able to grow its brand in part through a history of innovation.
Highlighted in GWA’s inaugural sustainability report (October, 2019) is a history of products and how they have helped shape the company, and significantly, water use. For example, Caroma developed the first dual flush toilet in 1980 which saves an estimated 32,000 litres per household per annum. The Caroma Smartflush technology further built on this in 2005 and almost halved the water requirements for a toilet again. GWA recently launched the Caroma Smart Command technology, an Ecosystem of products that enable building managers in a commercial sense to monitor and control water use in sites such as airports, shopping centres and office locations. A recent study commissioned by GWA showed an average overall water saving of 25% for the typical commercial building using the Caroma Smart Command product. Whilst it is early from a materiality sense to GWA Group, we understand this product has attracted significant interest from both Australia and abroad and we are watching how this develops closely.
We believe GWA is a sound investment opportunity, it is our premise that the market is currently overly concerned around near term cyclical headwinds with respect to housing turnover and building activity. Our focus is on the medium to long term and we are confident that the stock is attractively priced for the current operating environment and is factoring in little upside from either a) a future upswing in housing activity or b) a structural growth story as their product suite generates greater recognition.
Consistent with our process we see GWA as having a solid balance sheet, a well-regarded management team, a history of good cash flow generation and remains attractively valued, this is coupled for reasons outlined above with a sustainable business model and sound market position. We utilise the Ethical Partners Operational Risk Analysis (EPORA) to identify not only risks but also opportunities. We feel that GWA’s product set and business model presents one such opportunity as it relates to water scarcity.
Sources:
GWA Sustainability Report, 2019
Credit Suisse Research citing Chatham House Rules conference on Water, 2019. (https://www.chathamhouse.org/conferences/water-2019)
Ethical Partners owns shares in GWA
