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Environmental Solutions Outlook

Outlook
10 April 2024

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Latest Environmental Solutions outlook. 

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We remain reasonably balanced in terms of outlook and portfolio positioning. For some time, we have been cautious about the delayed impact of higher rates on economic activity. However, these concerns are beginning to ease. Although the US economy is slowing, it has been remarkably resilient, and is still growing at a healthy pace. Moreover, a slower US economy should give the Fed and other central banks scope to ease pressure by cutting rates. Whilst economies in Europe have been more subdued for longer, some lead indicators appear to be ticking up from a very low base. Of course, equity market valuations are clearly less compelling after strong performance, but this is less of an issue in our universe, where many companies saw a substantial derating in 2023.

Over the quarter we further reduced the yield sensitivity of the portfolio, trimming exposure to renewable Gencos and Utilities, as well as the likes of Sunnova. Conversely, we added to Water, Ingredients and Recycling. Cash was also reduced, leaving the portfolio essentially fully invested, with a beta close to 1.

One purchase in the Water space was Veralto, which was spun out of Danaher. The biggest part of the business is Water Quality, accounting for 60% of revenues. Within that, Veralto offers Water Analytics and Water Treatment. The former measures, monitors and tests water, while the latter treats predominantly industrial wastewater. We see Veralto as a very high-quality business that is guiding for mid-to-high-single-digit organic revenue growth, with the potential to be enhanced by accretive M&A. Tetra Tech and Ion Exchange were other water-related purchases over the quarter.  

Elsewhere we bought Japanese waste recycling company Daiseki. We previously owned the stock, but sold the position after it reached our price target. More recently the stock has been weak, falling back to a level which we saw as interesting. It is deploying capex at high incremental returns, and has also initiated a share buyback to return excess cash to shareholders.

Finally we added to Corbion, a Dutch biotechnology company specialising in sustainable ingredients and solutions for the food, biochemicals, pharmaceuticals and bioplastics industries. One of the issues that has weighed on the share price is Corbion’s leverage. However, it has now sold a non-core business for a good price, which should relieve these concerns. At the same time, the destocking cycle in the ingredients space looks to be largely played out, and we therefore believe that operating performance will pick up in 2024, especially as Corbion’s bioplastics joint venture is seeing a pickup in demand, and its algae-based fish food supplement business is growing rapidly.

Conversely, we sold SMS after it was bid for, and took some profits in Nari and Ecolab. 

EDPR was also sold as we believe that the investment case has been undermined by weak power pricing. This sale was part of a general effort to consolidate our Genco exposure into our highest-conviction names such as Serena Energia.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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