The Straits Times / The Business Times News on Hyflux

Chance to gain from water stocks: OCBC

The sector has underperformed ST Index from 2004 to Sept 2006

WATER-RELATED stocks have underperformed the Straits Times Index (STI) from 2004 to September 2006, and present an opportunity to profit from a lagging sector with long-term value, a technical report by OCBC Investment Research said last Friday.

Compared with the STI's return over that time period, 75 per cent of the water stocks in OCBC's universe have underperformed the benchmark return, and about half have underperformed the index over shorter time segments, said the report, which forecast 'an opportunity to profit from a lagging sector in the market'.

Using the end of September 2006 as an end-point for the time period, OCBC said the STI has risen about 50 per cent since the beginning of 2004, about 25 per cent since the beginning of 2005, and about 10 per cent since the start of this year.

Of the water stocks considered, Hyflux has reaped the greatest return over the nearly three-year period, having risen 114 per cent since the start of 2004. Bio-Treat Technology has seen a return of 53 per cent, comparable to that of the STI, but the others have fared worse.

However, Hyflux and Bio-Treat have 'suffered tremendously' and underperformed the STI since 2005. Hyflux has suffered a 48 per cent price decline since peaking at $3.92 in July 2005, and further 'near-term weakness' is expected, with the stock 'likely to dip into our immediate $1.70 to $2 support region, before making a stronger recovery', said OCBC. Hyflux closed at $2.39 yesterday.

Bio-Treat, too, has seen its price plunge nearly 51 per cent since a high of $1.34 in April 2006, closing at 70 cents yesterday. 'Price indicators have slipped into oversold regions, thus are poised for a rebound in the near term', with support at 60 to 65 cents, said OCBC.

Conversely, Asia Water Technology, Sino-Environment Technology, Sinomem Technology and Dayen Environmental have been the better performers in relation to the rest since January 2005.

Sinomem has 'recovered strongly' from a plunge earlier this year - it fell from a high of $1.05 in late April to 69 cents in late May, before rebounding, said OCBC. It closed at 92 cents yesterday. Some near-term weakness is expected, and the report recommended buying in when its price is near the support of 75 cents to 83 cents. It also expects short-term weakness or pullbacks for Asia Water, Sino Env and Dayen, but believes those stocks will continue to rise.

The report also recommended as 'good buying opportunities' United Envirotech and Zhonghui, calls that cautious investors may shrink back from. The pair have seen negative absolute returns for every period - 2004 to September 2006, 2005 to September 2006, January 2006 to September 2006 - that the report considered.