Thai Tap Water Supply

Thai Tap Water Supply Plc (TTW)

3Q13F profit up QoQ. We estimate TTW’s net profit at Bt600mn in 3Q13F, a drop of 4.3% YoY but growth of 15% QoQ. Behind the fall YoY was no repeat of the one-off Bt60mn tax refund for PTW. Growth QoQ came solely from the operational turnaround of CK Power Plc. (CKP), in which TTW holds 35%. CKP was able to cut interest expense by using the IPO proceeds of Bt1.4bn for debt repayment plus the stronger baht against the dollar lowered the FX loss. Excluding CKP would give TTW flat profit QoQ. It will release results on November 11.
Overall water sales grew 1.5% YoY, but slipped 0.3% QoQ. Overall water sales were 76.9mn cum in 3Q13, +1.5% YoY but -0.3% QoQ.  
- TTW’s water sales grew 1.9% YoY but fell 1.5% QoQ to 34.3mn cum in 3Q13. The QoQ fall arises out of a negative growth for water sales to the seafood export industry. Utilization rate was 85.6% in 3Q13, down slightly from 86.9% in 2Q13.
- PTW’s water sales inched down 0.1% YoY, but grew 2.7% QoQ to 34.6mn cum in 3Q13. It operated at 98.1% utilization in 3Q13 versus 95.5% in 2Q13.
- Water sales at Bang Pa-In industrial estate surged 34.6% YoY and 8.1% QoQ to 1.8mn cum or 42% of production capacity in 3Q13, an increase from 39% in 2Q13.
Small widening in gross margin. We estimate a small widening in gross margin of 1 percentage point QoQ in 3Q13 from 69% in 2Q13 due to cheaper electricity cost after a 9% decrease in FT cost during July-August 2013 plus lower electricity use during peak hours for TTW in line with lower water sales. This was more than offset by higher chemical cost: not only did prices of its chemicals jump 30% QoQ, but poorer water quality forced it to use more of the chemicals. In general, electricity and chemical costs are about 40% and 15% of total costs respectively for TTW and 15% and 4% for PTW. 
Look for stronger 4Q13. We expect a substantial rise in TTW’s profit QoQ in 4Q13, backed by Bt1.2bn BoI tax privileges under the BoI’s program for plant improvement after the floods. We will revisit our forecast.
Maintain BUY. We like TTW for its resilient operations, limited downside risk and as a dividend play. In the near term, a good 4Q13 could be a share price catalyst. We see TTW as a good investment in the current volatile stock market. With attractive TTR of 26%, we maintain our BUY rating.