Manila Water Co. Inc. (MWC:PM; MWTCY:OTC US) quenching investors’ thirst for growth
By Marc Djandji, CFA
Manila Water Co.(MWC:PM; MWTCY:OTC US) is a full service water utility company based in the Philippines. On October 9, 2013, according to the Business section of The Philippines Daily Inquirer news article, “Manila Water expands Vietnam presence”, (http://business.inquirer.net/146635/manila-water-expands-vietnam-presence), the Company, through its parent company, The Ayala Group has expanded presence in Vietnam. This was done with the closing of a deal to acquire approximately 31.5 percent stake in Ho Chi Minh City-based SaiGon Water shares. The price was 16,900 Vietnamese dong per share, or approximately Philippine Pesos (PHP) 34.18 per share, which is worth approximately PHP627.9 million. SaiGon Water has been listed in Ho Chi Minh City Stock Exchange for a little over a year, since September 2012. In a drive to limit its activities to projects where revenue is guaranteed, SaiGon Water in 2011 decided to focus mainly on environmental infrastructure development. The latest deal by Manila Water provides the Company with several opportunities to tap into the Indo-China market for infrastructure development, particularly in the areas of water and sanitation-related infrastructure needs. The Company is also capitalising on the global water shortage issues and is trying to diversify its overseas business. This is at a time where its domestic market looks to be saturated, and management is facing tremendous pressures on the revenue front. Particularly with issues relating to the ongoing disagreements with the Filipino water regulator, the Metropolitan Waterworks & Sewerage System (MWSS), which ordered the Company, and another company, Maynilad Water Services, Inc. to cut its utility tariffs. This came as a result of a pledge by some Filipino lawmakers to investigate 15.0 billion pesos (USD 342.0 million) in income taxes and other expenses that water utilities passed on to domestic consumers.
Brief company profile
According to the website of the Company (http://www.manilawater.com/Pages/Story.aspx), in 1995, the Company was founded when the Philippine government enacted the National Water Crisis Act and turned over the government-owned operations of MWSS to the private sector. The Ayala-led Manila Water Company took over the East Zone of Metro Manila, 40.0 percent of the capital city, under a 25-year concession agreement. This granted the Company exclusive rights to the use of land and facilities for the production, treatment and distribution of water, as well as the rights to operate the sewerage system.
The current market potential lies with it’s ongoing water shortage issues in the capital city of Manila. Here, from more than 6.0 million residents estimated to be living in the East Zone of the city, some 1.7 million come from impoverished families who cannot apply for water connections because they do not own any land of their own. To address this, the Company established the Tubig Para Sa Barangay (TPSB) programme in 1998. Through the assistance of both government and non-government organisations (NGOs), the Company leased land title requirements for these communities, and provided them water services at approximately a third of the normal cost. These efforts are also reflected in their continuous drive in practising social responsibility and contribute to the local community, while capitalising on the growing water shortage issues.
Latest operating and financial results of the Company
Consolidated Billed Volume in million cubic metres
Billed revenue volume in million cubic metres rose by approximately 38.0 percent to 579.4M cubic metres from 419.8M cubic metres in 2011. On a four-year Cumulative Average Growth Rate (CAGR) in percentage basis, this represents growth of approximately 10.6 percent from 2008 to 2012.
Number of households served (‘000s) (East Zone)
The number of households served as of end FY 2012 stood at approximately 1.3 million households, up from 1.2 million households in 2011 or a 4.6 percent increase. This is modest when compared to its four-year CAGR growth since 2008 of approximately 5.1 percent. The Company is allocated with the only license to operate in the East Zone region of Manila City. Therefore there are not many potential revenue opportunities that the Company can pursue, except to continue to provide higher quality service and to upgrade its water and sanitation facilities to better serve the community and its customers, among other things.
On a billed revenue volume per household served basis, the figure stood at approximately 0.46 times as of FY 2012, versus 0.35 times during FY 2011, or 32.0 percent increase. Using this metric, the growth rate on a relative basis using billed revenue volume per household served provides potential growth opportunities for the Company. Particularly when we compare this figure to the 10.6 percent and 5.1 percent growth rates as shown by the billed revenue per millions of cubic metres and number of households served basis. This rate, provides a relatively good picture on the potential revenue earnings rate based on the number of households the Company serves in the East Zone area, should the growth trend continue going forward.
Financial performance (All dollar figures are in ‘000s of Philippines Pesos (PHP))
Total revenues increased by approximately 21.1 percent to approximately PHP14.5 million during FY 2012 from PHP12.0 million during FY 2011. Net income margin during FY 2012 rose to approximately 37.4 percent at PHP5.4 million, up from FY 2011 of 35.6 percent or PHP4.3 million. Earnings before income, taxes, depreciation and amortisation (EBITDA) (a rough gauge of cash flow from operations (CFO), without the net working capital changes) rose by approximately 29.9 percent to PHP10.6 million during FY 2012, from PHP8.2 million during FY 2011.
Measure of financial leverage
Source: Company’s latest annual report for FY 2012
Total long-term debt to total assets as of FY 2012 stood at approximately 0.36 times, versus FY 2011 of 0.38 times, largely flat, and less than 1.0. Total long-term debt as a percentage of stockholders’ equity stood at approximately 0.89 times as of end FY 2012 versus 0.98 times last year, and by this measure alone, there is a decline in leverage by approximately 10.0 percent.
The consolidated long-term debt to total capital, stood at approximately 0.46 times during FY 2012, versus FY 2011 figure of 0.50 times, a reduction in leverage using both metrics.
A reduction in financial leverage might indicate a relative well-managed financial leverage exposures. However there are risks in the short-term due to the recent MWSS rein on the utility tariffs charged to consumers. The MWSS might not allow MWC to have additional wiggle room in increasing revenues to help counter the potential negative impacts from the latest Philippine government moves.
Valuation estimates of Manila Water Co., Inc.
Our fair value estimate using forward EV/EBITDA valuation measure comes to approximately PHP41.095 per share on approximately 2.04 million shares outstanding as of June 30, 2013. This represents an approximately 50.5 percent increase from the current price of PHP27.30 per share as of market close on October 08, 2013. My friend mentioned in the opening acknowledgement indicated a fair valuation estimate of approximately PHP44.200 per share. This was based on an estimate of 20.0 times forward earnings multiple, using FY 2012 EPS figure of PHP2.21 per share.
Although, it is not an apples-to-apples comparison given the application of different valuation measures in both our estimates, we believe that the Company has the potential to expand its businesses. Especially with the recent acquisition of a sizeable stake in SaiGon Water, and other potential international sites that the Company is actively seeking out. The growth potential, we believe, lies in the overseas regional markets including sites such as Myanmar, Laos, Cambodia, etc. These Southeast Asian countries face similar water shortage and sanitation issues as compared to its domestic market in Manila City, which could provide much added benefits to its expansion strategies going forward.
1) Continuing regulatory threat coming from its domestic utility regulator, MWSS, which might crimp some of its domestic revenue growth.
2) External shocks such as currency risks, potential devaluation of regional currencies might impact revenue generation.
3) Potential financial leverage risks that the Company faces due to over-expansion, foreign exchange liabilities, lack of revenue growth to cover interest payments, etc.
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