Thai Tap Water Supply

Thai Tap Water Supply Plc (TTW)
 

Investment thesis: We have downgraded our TTW rating from BUY to HOLD. Its YTD share price outperformance has largely priced in above-normal water sales growth this year and earlier inflationary expectations. We don’t think these features will continue to play out in the future—next year’s bottom-line growth profile looks only modest. Water sales growth will normalize and the scope for water tariff rises is limited, due to diminished expectations for inflation. Moreover, we don’t expect any new acquisitions in the foreseeable future.
New M&As unlikely to be seen soon … Although TTW is actively pursuing acquisition opportunities, progress now looks to be much slower than we earlier envisaged. The firm recently played down the possibility of it buying the rights to operate and manage treated water and waste water services, which it had previously guided may materialize by 2Q12. Furthermore, negotiations to buy stakes in solar projects failed to go anywhere, due to pricing issues.    
…but higher payout around the corner and tax reimbursement to boost 2H12: An upcoming tax refund boosts TTW’s 2H12 outlook. The Revenue Department approved its appeal against tax levied on PTW by the Provincial Revenue Department. As such, the firm is set to receive a Bt380m tax refund. As we don’t see any acquisitions ahead, we expect TTW to raise its DPS for this year from the Bt0.40 paid for FY11.
Tepid FY13 growth outlook of increasing concern …  With no M&A deals, we see only modest scope for FY13 profit growth—we model for a 6% YoY rise. Water sales growth shot up YTD, due to a post-flooding recovery in water sales and because the firm has rebuilt sales that were lost in 2011 to a new Provincial Waterworks Authority plant in Nakhon Pathom. But the growth rate will normalize back to single digits in FY13. Also, the potential for increases to the water tariff appear limited—inflation seems to be subsiding (falling oil prices will also ease inflationary pressures). 
…and upside to de-bottlenecking is 2 years out: TTW aims to de-bottleneck its PTW facility—construction will start by early FY13. The facility is now running at close to full utilization—current production is 370,000cu.m/day versus a nameplate capacity of 380,000cu.m/day. The debottlenecking will boost the PTW’s production capacity by 18% to 450,000cu.m/day for a marginal investment of Bt500m—less than half the cost of a greenfield project. But the new capacity isn’t slated for start-up till FY14.