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Why I think the Duxton Water Ltd (ASX:D2O) share price is a buy

The Duxton Water Ltd (ASX: D2O) share price is up over 1% today after reporting its monthly update for October 2018.

Duxton Water is the only pure water entitlement business in Australia. Its objective is to generate income from leasing out water entitlements and also benefit from long-term growth of the water entitlement value.

The company has returned 28.15% for shareholders over the past year through net asset value (NAV) per share increases and the payment of dividends. Over the past month its NAV increased by 0.22% despite the dilutionary effect of issuing an additional 7.5 million shares.

Duxton Water said that dry and hot conditions persisted throughout October with New South Wales, Victoria and South Australia recording their third, fifth and seventh highest mean temperatures on record, whilst also experiencing rainfall 9% below the mean across the Murray Darling Basin.

We are now entering the peak irrigation season, Duxton Water said it is well positioned with its high security entitlements and its positioning at the start of the year.

Water prices have continued to increase due to the limited rainfall, irrigators have had to irrigate earlier and in greater quantities. I am sorry for the plight of regional farmers, and have personally donated to those causes, however Duxton Water appears to be an excellent way to profit from the conditions.

Duxton Water said that its earnings per share (EPS), excluding capital gain, is 6.01 cents, which is 1.56 cents for the June 2018 half-year and 4.45 cents up to October 2018. This suggests the trailing dividend is comfortably sustainable, hopefully it will lead to additional slow-and-steady increases.

Foolish takeaway

With an acquisition pipeline of $23.8 million of water entitlements and a capital raising ongoing to fund those purchases, Duxton Water seems to be a good way to indirectly profit from the drier conditions and the growing demand for Australian agriculture. However, a wet year would likely be a negative to water prices.

It’s currently trading with a discount of 4% to the NAV, which isn’t huge but it’s better to buy shares at a discount to their underlying value than a premium. If Duxton Water wasn’t already a sizeable part of my portfolio, I’d be comfortable buying some shares at the current price for the long-term as it could produce good uncorrelated returns compared to the ASX.

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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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