Investing in utilities safe but not boring

Public utilities are essential for our daily lives, but they are also useful in an investor's portfolio.

Utility stocks maintain infrastructure to provide water, electricity and waste removal services.

Across the world, these companies range from traditional service providers, such as thermal power stations, to newer operators that generate electricity from the treatment of waste, noted a March 29 Singapore Exchange (SGX) market report.

Utilities are classified as a defensive sector, which means that its stocks provide constant dividends and stable earnings regardless of the state of the overall stock market.

Traditionally, the stable cash flow of these companies - most people will pay their utility bills on time to avoid getting a power cut - has attracted investors who are looking for low risk, minimal volatility and steady returns.

It also helps that governments usually allow these companies to run as a monopoly or with just a few competitors, as it would be inefficient to have multiple water pipes, power lines and telephone wires within the same area.

On the SGX, there are 10 stocks that make up Singapore's Utility Sector, consisting of companies that supply water, gas and independent power through renewable electricity production.

Together, they have a combined market capitalisation of $12.5 billion, an expansion of 80 per cent over the past five years.

Its capitalisation has also outpaced the growth of the MSCI AC Asia Pacific Utilities Index and the parent MSCI AC Asia Pacific Index, noted the SGX report.

Utility companies have a reputation of being risk-averse, but it is clear that many utilities see distributed energy as a growth opportunity, and are taking new, yet calculated risks through venture investments. Mr Andrew Mulherkar

Nonetheless, the Utilities Sector has also not been as strong as the broader market across Asia Pacific this year.

The MSCI AC Asia Pacific Utilities Index gained 4.3 per cent so far, compared to the 6.7 per cent gain of the MSCI AC Asia Pacific Index.

But utility stocks might still offer a good deal.

 

Utilities make up 5 per cent of the MSCI AC Asia Pacific Index, with the segment trading at lower valuations, yet marginally maintaining higher return on equity ratios over the past 12 months, noted the SGX report.

The 10 utility stocks on the SGX have an average 5.2 per cent year-to-date gain, similar to the MSCI AC Asia Pacific Utilities Index that gained 4.3 per cent.

Their performances have been mixed, with six gainers, one stock unchanged and two decliners. One stock is currently suspended from trading.

Experts noted that the current rising interest rate environment might have a role to play in investors' demand for utility stocks.

HARD-TO-GET YIELDS

A Forbes report last month noted that lower rates tend to result in growing demand for utilities, since their yields are hard to get elsewhere.

Last year, expectations of higher interest rates led investors to dump utilities because they thought that rising rates would benefit other sectors, such as banks.

Investing in utilities may also have a reputation for being staid and safe, and it is often noted for its popularity among retirees.

But the landscape is quickly changing, noted a recent report by GTM Research.

Last year, utility companies in North America and Europe pumped more than $1 billion in investment into distributed energy companies (such as solar, software, storage, combined heat and power, and a range of grid management technologies) - triple the value since 2010.

"Utility companies have a reputation of being risk-averse, but it is clear that many utilities see distributed energy as a growth opportunity and are taking new, yet calculated risks through venture investments," said Mr Andrew Mulherkar, senior grid edge analyst and one of the authors of the report.

The utility companies on the SGX are also known for their cutting-edge technology and shift towards renewable energy.

Of the 10 stocks, the three top performers in the year-to-date are Chinese waste-to-energy (WTE) power plant company C&G Environmental Protection, local water and energy firm Hyflux and Australian utility provider AusNet Services.

AusNet Services is the largest stock among the 10 in terms of market capitalisation, while China Jinjiang Environment Holdings, which had its initial public offering last August, is the latest utility stock to list on the SGX.

Executive chairman and chief executive officer of China Jinjiang Environment Wang Yuanluo noted that the company has been able to harness opportunities brought about by favourable government policies as well as growing demand for electricity supply and waste treatment from the local municipal authorities.

Another firm to note is local success story Hyflux, which has a current market capitalisation of $448 million and generated a total return of 10.7 per cent in the year-to-date.

Hyflux, which was founded in 1989, specialises in water and fluid treatment globally across Asia, Africa, Middle East, and North and South America, with a focus on Singapore for its operations.

Last year, Hyflux's net profit was "hard hit by weak Singapore electricity market" but SGX noted that "the higher revenue was mainly contributed by the TuasOne WTE project and Qurayyat Independent Water Project (IWP)".