Thai Tap water Supply

Thai Tap water Supply Plc (TTW)
- 3Q13 profit much higher than expected from extraordinary income and early BOI tax exemption
TTW's 3Q13 profit was B825m, leaping 31%yoy and 58%qoq, due to
extraordinary profit from the sale of CKP stocks (B3m) and investment
adjustment in CKP at the total of B113m. Excluding extraordinary items, TTW's
normalized profit made a record high at B712m, surging 26%yoy and 42%qoq,
22% higher than our projection (25% above consensus), as TTW benefited from
BOI tax exemption from the maintenance and improvement of pipes and
pumping stations after the 2011 flood at the total of B1.2bn, which was earlier
than expected (expected in 2014, actually recognized in June 2013). Thus, 3Q13
tax was exempted by B140m. Other items were as projected: 1) For core
business, water sales volume stayed flat (falling 2.6%qoq for TTW, but rising
1.6%qoq for PTW and 7.7%qoq for Bangpa-in). 2) Gross margin rose slightly
from 2Q13 by 1.2% to 70.2%, better than expected. 3) Share of profit from
affiliated CKP rebounded from B22m loss in 2Q13 to B40m profit.
- 4Q13 normalized profit to stay high. To leap by 20% in 2014
4Q13 profit is projected to contract from 3Q13, as there would be no
extraordinary profit. Normalized profit is likely to drop slightly from 3Q13, which
is the peak season. 4Q13 water sales volume is likely to rise slightly in high
season, especially from export-involved factories under TTW's coverage, which
are TTW's main clients. This might negate declining share of profit from affiliated
companies after the end of a high season. BOI tax exemption will benefit TTW
for another two years, whereas the benefit for the subsidiary (PTW) would
change slightly from our projection: from the same exemption as TTW
(immediately effective, covering PTW's total water sales volume) to covering
only PTW's water sales volume exceeding 288,000 cubic meter/day (from the
total production of 388,000 cubic meter/day), or covering at the total of B259m.
However, PTW's water sales volume exceeding 288,000 cubic meter/day has
been under the condition for BOI tax exemption from PTW’s permission to
increase production capacity since 2008, which expires on 30 July 2017 and can
be renewed for five years. Thus, TTW tax expense (from PTW) would be B151m
in 2014 and B228m in 2015 instead of being tax-free in both years, but 2017-
2021 tax would be deducted by B50m. Moreover, share of profit from affiliated
companies would drop by B50m. Accordingly, we revise down TTW’s FY2014
profit forecast by 10%, and by 11% in 2014. However, we revise up FY2017-
2021 profit forecast by 2%p.a. Under the new revision, normalized profit would
rise by only 5% in 2013, but leap vigorously by over 20% in 2014.
- Interesting in 2014. Good when SET fluctuates. 6% dividend yield
This is one of the defensive plays with possibly outstanding growth in 2014,
interesting when the SET is fluctuating. As the current share price is attractive
and dividend yield is as high as 6%p.a, we reiterate "BUY".