Tap-water firm's ipo is a buy: brokers

"We estimate TTW stock's fair value this year at Bt4.80 each and its IPO price at a P/E (price-to-earnings) ratio in 2008 of 11 times," Pipat Kwanpaekaew, an analyst at UOB Kay Hian Securities, said last week.

Subscription is open today and tomorrow. The shares debut on the Stock Exchange of Thailand on May 22.

The company is the largest among the 81 private tap-water suppliers nationwide. It and its 98-per-cent owned subsidiary Pathum Thani Water (PTW) have a combined capacity of 628,000 square metres a day, accounting for 56.3 per cent of the overall capacity of private firms. TTW operates in Nakhon Pathom and Samut Sakhon while PTW services Pathum Thani.

TTW has a concession to sell treated water to the Provincial Waterworks Authority (PWA) until July 20, 2034, with a renewal option, while PTW's contract runs through 2023 with a renewal option.

Both TTW and PTW plan to build more treatment facilities to expand tap-water production capacity by 100,000 square metres per day this and next year. The group's capacity will be raised to over 800,000 square metres per day by the end of next year.

UOB Kay Hian Securities said in a research note that TTW would enjoy an edge over other private tap water suppliers from its economies of scale.

TTW averaged 40-per-cent growth per year in output over the past four years as the numbers of plants and population in its service area rose 7.52 per cent and 1.57 per cent per year from 2005 to 2007.

TTW already runs a profit margin of almost 70 per cent, which will be even better if its liquid alum plant with annual production capacity of 50,000 tonnes goes on stream. Alum is the main chemical used to produce tap water, and chemical costs represented 11 per cent of TTW's costs and 15 per cent of PTW's costs last year. Both use about 30,000 tonnes of alum per year.

TTW's concession gives it the right to raise its rates on January 1 every year, based on the change in the consumer price index for greater Bangkok, the brokerage said.

Its rate has increased from Bt17.44 per square metre in 2004 to Bt22.75 at present.

TTW has minimum off-take quantity with PWA at 89 per cent of current capacity and this can guarantee the company's income stream. PWA must purchase at least 250,000 square metres a day this year and 300,000 square metres a day throughout the agreement.

PWA can set an annual minimum off-take quantity each year during the contract; this must not be below the previous year's minimum level. For last year, the minimum off-take was set at 260,000 square metres a day, representing 90 per cent of its current capacity of 288,000 square metres a day.

The company has said it will pay an annual dividend of Bt0.15 per share, accounting for 55 per cent of annual profit, in October.

The securities house said TTW's debt-to-equity ratio would fall from 2.6 to 1.2-1.3, as a major portion of the IPO proceeds will go to paying off debts.

"The stock of TTW can compare with that of Eastern Water Resources Development and Management, which delivers raw water to industrial estates in the East. EASTW's current P/E at about 15, and P/BV (price-to-book value) at 3.57, are greater than TTW, while its gross and net profit margins are below TTW's," the brokerage said.

TTW's risks are the possibility of concession cancellation or failure to renew the contracts, the brokerage said.

A local brokerage also recommends investors to buy TTW's IPO shares. It forecasts TTW's net profit rising nearly 11 per cent this year.