Many water professionals expressed their concerns about the sector’s financial valuation, aka the water value. Are their fears justified? 😬
This is part of the special series of “Water & Wastewater 101” episodes we run on the (don’t) Waste Water podcast!
The origin of a legend on Water’s Value
End of April, Global Water Intelligence updated their World’s top 50 list of water businesses.
The highlight, of course, was the change in the top 3, following SUEZ’s acquisition by Veolia, with Veolia now a more dominant leader than ever and a mini SUEZ walking one stair down on the podium, leaving rank 2 to Ecolab.
But something else really caught the attention of the Water Professionals: doing the quick maths and adding up all the listed companies’ figures, you end up with shortly less than 130 Billion Dollars in yearly revenue.
This collides quite violently with the current hype around ByteDance, TikTok’s mother company. As we speak, and according to many newspapers, the fast-rising social media brand is valued at 250 Billion Dollars.
Are we comparing apples with apples?
So again, doing quick maths, we may draw a fast conclusion: The 50 largest water companies all together hardly represent half the valuation of the 7th largest social media company alone!
But wait, aren’t we comparing apples with oranges? GWI’s list of water companies ranks them on Revenue, while ByteDance’s 250 Billion Dollars figure is its Valuation.
What’s the difference between those two terms? Well, that’s probably the point in time where we need expert input to cut through the fog.
This is why I reached out to Nicola Lei Ravello, an Independent investment consultant and founder of White Stag Investing, a research platform for responsible investments.
What’s the difference between revenue and valuation?
Nicola Lei Ravello:
Well, those are very two different concepts.
Think of a company as a machine. It’s a machine that takes water, takes engineers, and does something about it.
Then, at the output, you’re going to have all the types of resources. For instance, you’re going to have money.
So that’s what the machine does: it creates products, which in general receive money. The amount of money that goes every year into the machine by selling this product, is your revenue.
You could think about revenues as a stream of money. Valuation is not a stream, it’s more like a fixed quantity. Like how much your business is worth.
We basically have this machine, this company handling water, working around water, consulting on water: that makes money. Valuation is how much you’re ready to pay for this machine. How much you’re ready to pay a machine that is able to deliver water to everyone.
Would you rather listen to this deep dive on the Water Value? Check it out here 🔽
Converting water revenue figures into water value
Now that the difference between revenue and valuation is clear for everyone, I would like to do a little exercise: convert the revenue figures of Global Water Intelligence’s top 50 into valuation.
But when I start from the top, I find something weird. Veolia and SUEZ, before their merger, have combined revenues of 25 billion dollars. If we add up their two stock market values, it reaches roughly 34 billion dollars. So here, the one-to-one relationship between Revenue and Valuation does not sound overly wrong; it would be rather 1.5 to one.
Yet, if I go to World’s number 4, Xylem, it has a revenue of 4.9 billion dollars and a market value of 21.4 billion. So this time, I have an over four-to-one relationship between valuation and revenue.
Why do we have such gaps? Are water revenue and water value linked at all?
Nicola Lei Ravello:
We have such gaps because of what I told you before. Revenue is a stream of money coming into your company. Whereas valuation is how much your company is worth.
Valuation is like, how much are you ready to pay to have access to the stream of money that your company is making.
So, if revenue is not the best proxy to calculate a company’s water value, what would be a better one?
Nicola Lei Ravello:
Revenue is a bit of a raw measure (the sum of the money you get by selling your products.)
Let’s say that you have an account. That’s like a water tank. All the money that you have in this water tank is the money from your revenues.
But to make those goods, you needed money for the materials, the engineers and some more stuff. So you have to subtract this money you’ve been using: that reduces your revenues.
Again, revenue is pretty raw. It’s just the money you make. Earnings at the end of the day is what you really earned by doing your business. After you’ve paid for pretty everything.
EBIT or EBITDA is a better proxy to calculate Water Value
Nicola Lei Ravello:
EBIT means Earnings Before Interest and Taxes.
You make money by selling your goods, let’s say, one million. To make those goods, you maybe paid 300,000, so you’re left with 700,000. That’s like the gross margin.
Then you have a lot of costs: personnel, expenses, rent… You subtract this. And this is going to be EBIT, again Earnings Before Interest and Taxes, and that’s maybe 400,000.
Obviously, to make your business, you probably had to take a loan from the bank and you pay interest on this, you probably pay taxes. When you subtract this again, then you get that EBITDA.
Basically. It’s the different levels of how you slice your cashflow.
What is the typical multiple to apply to estimate Water Value?
Nicola Lei Ravello:
A common measure of valuation is the price to earnings ratio. For $1 of earnings, how much are you ready to pay.
Earnings being EBIT in this case?
Nicola Lei Ravello:
Yes, we can say that. I mean, let’s just talk about earnings. Like that’s the amount of money you have after you’ve paid everything. And that’s the key for the PE ratio.
Basically, the difference between valuation and earnings, to take a market average price, is to pay a company 20 times for its earnings. So if a company makes 1 million of earnings, you pay 20 million for that. That’s the average.
For most water companies, their valuation, their water value, is on average between 40 and 50. And for the best ones, like Xylem or Ecolab, it’s about 70, which is really expensive.
Calculating the World’s top 50 Water Values
Let’s recall our SUEZ – Veolia example. If we now compare their market valuation with their earnings, we end up with a 21 Ratio. So fully in line with the range Nicola just shared.
Now that we have the recipe, we can proceed to estimate the valuation of the entire top 50.
For companies that are listed, it’s pretty straightforward: we take their market valuation.
Let’s pick an example.
Example 1: the Water Value of A.O. Smith
10.93 Bn$ Valuation for a Price Earning Ratio of 28.35.
I report it in the table and do exactly the same for the 35 other publicly listed companies.
Example 2: a bit more complex, the Water Value of Grundfos
Grundfos is not publicly listed – like 14 companies in our top 50. Grundfos is even a bit more special; it’s a foundation!
For all these companies, I sorted them into two categories: industrial players and utilities.
I first looked for their earning figures. Sometimes, it was publicly available; in other cases, I had to estimate and went for 10% of their revenue.
I then applied a 20x multiple for utilities, and for industrial players, I went for 30x.
In our example, Grundfos had 2020 Earnings of 2.6 Billion Danish Crowns, which makes about 425 Million US Dollars. If we apply our 30x multiple, it provides us with a valuation of 12.75 Billion Dollars!
Again I do the same for the other 13 companies still missing their valuation, and considering all of this, I end up with a total water value figure of slightly over 376 Billion dollars.
Victory! Water Value > TikTok Value
Victory, the water sector out beats the lame 250 Billions of ByteDance.
Okay, it takes 50 companies to out beat one, but still, Water wins!
Beyond TikTok’s Valuation
I wanted to check one last thing, though. What hides behind this ByteDance valuation?
The company had a 2020 revenue of 37 Billion dollars. Yet, we’ve just seen that revenue does not help much to define valuation. So what are the earnings or the profits of ByteDance? Undisclosed so far, even if Bloomberg reported sources, claiming a profit of 3 Billion dollars.
You may or may not believe this to be true. Remember that it took eight years for Facebook to make their first profits and that Uber never did any in over 12 years.
Anyways, the Bytedance Valuation at 250 Billion dollars provides us with a multiple somewhere between infinity and 85. By any measure, totally out of the Water Industry’s league.
So here’s a last question for our expert, Nicola Lei Ravello.
Is there a truth to interprete beyond the Water Value?
Is there any truth to find in the multiple, the financial markets apply to a specific company or sector? Shall we be worried as an industry?
Nicola Lei Ravello
Valuation in private markets always depends on someone that is ready to put that amount of money.
You can have a startup, you don’t make any products yet, you just have a good idea, and a guy comes that says: “I think that these guys are going to be super successful. I’m going to give them one million.”
Suddenly this thing is worth something, but at the end of the day, it’s how much people think what you’re doing is worth.
I have an evaluation about a company. You have an evaluation of a company. You have a subjective opinion, you know, of how much this company is worth, and I have one.
Basically, the market value, as per the water value, is somewhat an aggregate of all these subjective opinions.
Our expert’s closing tirade on Water Value:
Do you have more questions, you’d like us to answer?
The topic of Water Value Vs. TikTok Value came from repeated questions you addressed me. I’d be glad to answer some more!
You can reach out on LinkedIn, or using the contact section of this website.