It has been a tough year for ASX shares in 2022. Inflation and higher interest rates have been hurting investor confidence and thoughts about valuations.
The S&P/ASX 200 Index (ASX: XJO) is down by almost 10% in 2022. Looking at one of the most popular ways to invest in US shares, the Betashares Nasdaq 100 ETF (ASX: NDQ) is down around 25% this year.
But, there have been a few places to find opportunities that have delivered a positive return. For example, oil, gas, and coal businesses have seen a strong increase in their respective resources, and this has led to good cash flow and boosted their share prices.
But, 'fossil fuels' are not the only commodity businesses to have outperformed the ASX 200 in 2022. One of those names has helped my portfolio offset some of the declines that have hit some of the names.
Duxton Water Ltd (ASX: D2O)
This may not be a familiar name to some, or many, investors. According to the ASX, it has a market capitalisation of $194 million. For the ASX, that makes it a small-cap ASX share.
The company says that its primary investment objective is to build a portfolio of permanent water entitlements and utilise this portfolio to provide flexible water supply solutions to Australian farming partners. We all need to eat, so Duxton Water plays an important part in the food production process.
It generates a return by offering irrigators a range of supply solutions, including long-term entitlement leases, forward allocation contracts and spot allocation supply.
In 2022, the Duxton Water share price has risen by 7%.
My latest, and highest-priced, purchase of Duxton shares came in May for an average price of $1.525. So, I've made around 9% in capital growth since then. That's certainly not going to make me a millionaire any time soon, but I think it has demonstrated some defensive characteristics.
Plus, Duxton has declared a dividend of 3.3 cents per share since my latest investment, which went ex-dividend on 13 October 2022. This adds another 2% to the return.
What has helped generate returns?
It has been an interesting time for Duxton. With many commodities, one may expect there to be cycles of strong demand and then weak demand.
As many Aussies may have noticed, there has been a lot of rain this year.
The ASX water share has outlined that despite the persistent wet conditions, permanent entitlement values continue to trade at close to all-time highs. Duxton wrote:
We believe it is the long-term demand and supply drivers that underpin the entitlement markets that have caused entitlement values to remain stable during this period of extreme wet (primarily led by the expansion of permanent horticulture and irrigators seeking long-term water security).
In its quarterly update, announced yesterday, it said that permanent water pricing across the southern Murray Darling Basin increased by 0.31%, resulting in an approximate 15% increase since 30 September 2021.
Why I still like the business
I think the Duxton Water share price still represents good value.
At 30 September 2022, the company had a post-tax net asset value (NAV) of $1.93 per share. Excluding tax provisions for unrealised capital gains, it was $2.23.
The current Duxton Water share price is at a 14% discount to the post-tax NAV and over 25% to the pre-tax NAV. I don't think that the ASX share is going to sell all of its water entitlements, so I'm paying more attention to the pre-tax NAV.
I also like the growing dividend profile. The final dividend for 2022 is guided to be 3.4 cents per share, and 3.5 cents per share for the interim dividend in 2023. That means the forward grossed-up dividend yield is guided to be almost 6%. An ongoing share buyback is also helping shareholder returns.
