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Thai Tap water Supply

4Q13 net profit to weaken from extraordinary income, but attractive for 6% dividend yield BUY

Thai Tap water Supply Plc (TTW)

- 4Q13 net profit to weaken from extraordinary income but normalised profit normal

We project 4Q13 net profit at B366m, falling 35%yoy and 56%qoq as a result of

tax expense from 2012. TTW considered that the eight-year BOI tax exempt

contract started in July 2004 and ends in July 2012, whereas the Revenue

Department claimed that the contract started in January 2004 and ends in

January 2012. Thus, additional B260m tax expense would be recognized.

Excluding the extraordinary item, TTW’s 4Q13 normalized profit would return to

normal at B627m, rising 12%yoy but falling 12%qoq due to the following factors:

1) 4Q13 water sales volume would stay flat for TTW and PTW, but grow 5.3%qoq

for Bangpa-in. 2) 4Q is usually the quarter with the lowest profitability. 4Q13

gross margin is expected to drop by 1.7%qoq due to the increase in chemical cost

for low-quality water. Also, 4Q13 selling and administrative expense would

increase. 3) Share of profit from associated CKP (TTW holding 25percent stake) is

projected to drop from 3Q13 by B20m, which is the peak season due to suitable

weather for electricity generating.

- FY2014 normalized profit to grow 20percent from BOI tax exempt and associate's strong income

We project that FY2014 net profit would make a new high. Normalized profit is

expected to grow by 20%yoy, mainly from the following factors:

1) Income from the core business is likely to grow steadily by 5%yoy, less than

the company's target at 7-8% growth. Under a conservative consumption, water

sales volume is expected to rise by 3%yoy (targeted at 6%) and water price is

projected to increase by 2% (CPI).

2) TTW would benefit from the BOI tax exempt that compensate for the 2011

flood damage in 2014. Thus, tax expense would decrease from 2013 by B150m.

3) Share of profit from CKP is expected to increase by at least B40m from 2013.

Income from Bangpa-in Cogeneration (117.5 megawatt) would be recognized for

a full year (opened on 28 June 2013). The project would significantly increase

CKP’s profit.

- "BUY" for 3.6% dividend yield in 2H13 and 6.2% in 2014

TTW’s price has decreased, making PER of 13x, which is close to the previous

five-year average. We recommend "BUY" as the fair value of B13.3 implies 38%

upside and FY2014 dividend yield is as high as 6.2%. Moreover, 2H13 dividend

yield is 3.6% (B0.35/share). 4Q13 earnings result would be announced on 27

January 2014.

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