Thai Tap Water Supply
Results as expected; modest impact from flooding BUY (maintained) Target Price: Bt6.75 Price (31/01/12): Bt5.60
Thai Tap Water Supply Plc (TTW)
Profit in line with estimate: TTW posted 4Q11 earnings of Bt514m, down by 7% QoQ but up 3% YoY. The result was in line with our estimate and the street projection.
Results highlights: The weaker QoQ profit was largely due to modest decreases in sales volumes at most facilities and higher OPEX. The firm reported average water sales at the TTW plant of 341,720cu.m/day (up 3% QoQ). But the flooding squeezed sales volume at the PTW facility by 2% QoQ to 354,561cu.m/day and the BIE waste-water plant reported a steep 36% QoQ plunge in throughput to 11,643cu.m/day. OPEX and SG&A also rose during the period, due mostly to increased use of chemicals (the flooding meant that the quality of raw water deteriorated) and seasonally high marketing expenses.
Outlook: While we anticipate a gradual recovery in post-flooding water sales and a hike in this year’s water tariff in tandem with a higher inflation index, the expiry of the tax holiday at the TTW facility will probably outweigh the effect of the operational improvement.
What’s changed? We maintain our FY12 earnings projection unchanged at Bt1,937m. As such, we model for a 9% YoY bottom-line contraction—TTW is due to start paying income tax in 1Q12. But we have yet to include earnings accretion from CK Power. TTW aims to spend Bt2.7bn to acquire a 30% stake in CK Power. The deal is due to be completed in 1Q12. As the purchase will be funded entirely by debt, we anticipate earnings accretion of Bt40-50m annually, or a 2-3% boost to yearly profit.
Recommendation: Despite its 15% rise in share price over the past two months, we view that TTW’s current valuation remains undemanding (consistent with its long-term average) with a generous dividend yield exceeding 7%. Additionally, a rising inflation trend is expected to manifest in May and peak at about 6% by YE12—that should prompt for a further re-rating, as the firm’s contracts with the Provincial Waterworks Authority allow it to peg its water prices against headline inflation.
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