Eastern Water Resources Development & management

Eastern Water Resources Development & management Plc (EASTW)

2Q12 profit projected to notably grow 35% YoY due to constantly high gross margin

2Q12 profit is projected to still be impressive with the growth of 35% YoY from the
raw water business that has increased the selling price by approx 8% YoY and raw
water sales volume that has increased in 2Q12 by 7.2% YoY. For the tap water
business, there has been an increase in volume by 11.3% YoY, resulting in 14.5%
growth of total income. Despite the impact from the increase of FT in June 2012
(electricity cost is 36% from cost of sale) but the gross margin is projected to
increase outstandingly from 60.9% in 2Q11 to 64.8% due to the following reasons.
1) The electricity cost has decreased due to the temporary maintenance shutdown
of Bang Phra reservoir (Chon Buri) from 1Q12 for 1.5 month. Accordingly, water
had to be transmitted from Nong Kho reservoir instead, in which the electricity cost
in raw water pumping is the cheapest at around B0.5/cubic meter compared with
Bang Phra reservoir at B0.7-0.8/square meter. 2) The cost of raw water has
declined due to the decreased buy of water from the local supplier that has a high
cost at B6/cubic meter compared with the normal cost from reservoir at
B0.5/square meter. In terms of SG&A/sales, it is projected to decrease from
12.6% in 2Q11 to 11.5%. In addition, there’s a benefit from the tax that is
reduced to 23%.

2012 profit revised up 10%, growing 29% YoY with supportive factors in long term

The growth on the eastern area, especially the gradual relocation of the industrial
estate, will help boost the sale growth of raw water in a long term which will be
evident in 2-3 years. Accordingly, EASTW has expanded the maximum capacity of
the reservoir in Tubma project in Rayong from 32,000,000 cubic meters to
55,000,000 cubic meters, which is projected to complete in 2015. In a short term,
due to the gross margin is constantly high which exceeds our expectation, we
revise up our forecast for the 2nd time in this year by increasing 2012 and 2013
gross margin from 61.5% to 63.9% (1H12’s projected at 64%). Moreover, the
gross margin is projected to stabilize continuously at a high level in the following
year since there’s a benefit from the increase of water charge by B0.5/cubic meter
which can offset the depreciation cost of Nongplahlai pipeline 3 that will increase in
2013 by B55m/year approximately or B0.22/cubic meter. Furthermore, the sale of
tap water has grown higher than projected, so we revise up our 2012 and 2013
profit forecast by 10% under a new assumption that 2012 net profit will stand at
B1,303m or an increase of 29% YoY and a continuous growth by 12% in 2013.
Nevertheless, we haven’t included the result of BOI for Nongplahlai pipeline 3 (the
capacity of water transmission is 105,000,000 cubic meters or 36% of the total
transmission capacity) which is about to be reported in the late of 2012.
Preliminary, the tax expense will be saved by approx B115m/year and the profit
will increased by 10% per year, adding around B1.5/share.

New 2012 FV is B12.5. Upgrade to “BUY”
we upgrade our recommendation from “HOLD” to “BUY” due to continuous
and robust growth, dividend yield projected at 5.3% (1H12 yield is projected
at approx B0.15/share) and the new 2012 fair value, using DCF, that is
revised up from B10 to B12.5 with 23% upside. The mentioned fair value
doesn’t include benefits from the future projects such as investing with
alliance in Myanmar to prepare for the expansion of business after entering
AEC and the tap water treatment from seawater. However, the short-term
risk for EASTW is the precipitation deficit, putting caution to the water level in
the reservoirs and lack of water in 2013. Accordingly, the profit in 2013
might not be as expected, so investors should keep an eye on this matter
between September–October which is supposed to be the time for rainy
season. Nevertheless, 2012 earnings result is projected to turn out as
expected.