Thai Tap Water Supply

-2Q12F to show good growth YoY, but down QoQ without last quarter's one-off tax refund for PTW
-2H12 profit lower on return of tax liability for TTW and increased interest burden
-Good operations from rising demand (+6% YoY) and 3.5-4% tariff hike

 
2Q12 profit estimated at Bt595mn (released July 27).  We estimate TTW’s net profit at Bt595mn in 2Q12, solid growth of 9% YoY thanks to rising demand and a tariff hike. Without first quarter’s Bt91mn tax refund for subsidiary Pathumthani Water (PTW), on a QoQ basis profits will be down 11%. Our 2Q12 forecast, if met, would bring 1H12’s profit to Bt1.2bn, or 54% of our 2012 forecast.
Look for weaker performance in 2H12. Higher corporate tax after TTW’s BoI privileges expire will pull earnings down. Though contribution from CK Power, in which TTW holds 30%, will be higher, this will be largely offset by the higher interest burden brought by the purchase of the stake since it was financed entirely by debt.
Demand up 6% YoY. In 1H12, total water dispatch was 146mn cum, +6% YoY, coming largely from demand growth of 9.2% YoY for TTW thanks to inorganic growth from the switch by Samut Sakorn local administration from underground to tap water in 3Q11. PTW had organic growth of 5% YoY, but Bang Pa-In Industrial Estate (BIE) demand remains low, falling 31% YoY.
Tariff hikes.  Base tariff was bumped up 3.5% to Bt26.01/cum on January 1, 2012 for the amount below minimum guarantee and Bt11.49/cum for the volume above the guarantee level for TTW and 4% to Bt11.83/cum for PTW, in line with the CPI.
Maintain BUY.  We continue to like TTW for the resiliency of its core business and as an inflation hedge. Upside risk to our forecast is ~Bt390mn tax refund for corporate tax of PTW if the court rules in favor of PTW in the dispute with the Revenue Department for tax payment during 2008-2010. With attractive ETR of 15%, we maintain a BUY rating on the stock.
Forecasts and valuation