Our water supply perspectives
are on dramatic change.

Population growth also account the increased of water demand. According to studies, since 1900, there has been at least 6 times increase in water usage for only 2 times increased on our population. The demand is getting bigger.

In line to this issue, let’s sneak a peak on the company performance of Manila Water Co., Inc. (MWC) for 1st half of 2011. MWC is a public listed company of Philippine Stock Exchange. (source: Philstock)
 

Reported a 2% increase in net income of PhP2.0bn in the 1H11 from PhP1.97bn in the same period last year on higher revenues. Core net income for the period however, grew by 9% to PhP2.1bn, net of the mark-to-market losses which the company took from its PhP4.0bn bond offering and higher financing charges from its corporate notes issued last April.


Revenues climbed 6% to PhP5.8bn in 1H11 from PhP5.5bn the same period last year, driven by a 4.5% increase in water revenues of PhP4.7bn, and PhP802m in environmental charges which went up by 15.8% year-on-year. The revenue increase was also helped by a tariff hike which was effected last February 2011. Total cost and expenses for the period grew by a slower rate of 3% to PhP1.5bn. This resulted in the company’s EBITDA to rise to PhP4.3bn, up 7% from PhP4.0bn in the same period last year. A 23% jump in interest expense to PhP808m in 1H11 was due to the issuance of the company’s PhP10bn corporate notes last April. In addition, a PhP141.6m charge for mark-to-market losses on its PhP4.0bn call option was booked during the period. EBITDA margin for the 1H11 stood at 74%.

Billed volume growth was flat, totaling 207.5 million cubic meters (mcm) in 1H11, or 0.6% from the 206.3 mcm recorded in the same period in 2010. The East Zone area, MWC’s biggest, posted a 0.4% growth to 203.3 mcm in 1H11. Laguna volume went up 14% to 2.2 mcm, while Boracay, the company’s latest service area, jumped by 17% to 1.3 mcm.

Total service connections increased by 5% to 863,400 in 1H11 from 822,100 in 1H10, on faster connection growth rates in Laguna (+25.6%) and Boracay (+17.1%). Water connections in the East Zone meanwhile grew by 4.5% to 836,000 in 1H11. But while service connections saw an increase in the first semester, overall water consumption decreased by 7.2% to 45.2 cubic meters per month per connection, due mostly to a “wetter” summer.

Non-revenue water (NRW), or water losses due to leaks, showed consistent reductions in its three service areas.

* East Zone: 11.5%, down 2 percentage points;
* Laguna: 38.0%, down 6 percentage points;
* Boracay: 24.0%, down 11 percentage points

These improvements in efficiency can be attributed to the completion of NRW projects, new water network lines, and supply management.

Pipeline prospects for MWC include the participation to bid for Cebu City’s water project, and possible water projects for fast growing regions such as Iloilo, Cagayan de Oro, Pampanga, Bulacan and Baguio City. Overseas, MWC is looking to expand its presence further in Ho Chi Minh, Vietnam; Indonesia and India. The company is encouraged by its performance in Vietnam but has still to make significant ground in Indonesia (looking for a local partner) and India (highly competitive industry).



Undervalued with solid long-term potential. MWC’s 1H11 earnings are just within expectations and should hit its full-year target of PhP4.0bn given its steady service areas revenue stream and decreasing NRW ratios. Long-term prospects of expanding its operations into high-growth cities within the country and abroad (Vietnam, Indonesia and India) are encouraging which should provide a wider revenue source in the future. At PhP19.02 per share, MWC is trading with a PER of 9.5x this year’s estimated earnings and around 8.9x for 2012, presenting an attractive 26% discount to the utilities average multiple of 12.8x and 30% discount to the market’s 13.5x multiple. MWC may have underperformed versus the PSEi index in the last 52-weeks but its growth potential and discounted value is worth considering for the long-term. Target price at PhP24.00. Long-term Buy.

Good Luck.