- Capacity expansion ahead. The TTW and PTW boards approved an expansion in daily production capacity of 450K cum and 100K cum respectively, despite no extension of the water purchase agreement with the Provincial Waterworks Authority (PWA). Downside is small, as demand is growing beyond capacity and PWA is already taking more than the minimum off-take.
- TTW’s new capacity of 450K cum/day will be divided into phases. The first phase is budgeted at Bt1.85bn, 100K cum/day, and will come on stream by end-2015 or early in 2016. With demand from industrial users (textiles and seafood exporters) growing, especially upon the recovery of exports, TTW expects demand growth of ~8-9mn cum p.a. This implies its current plant will be running at full capacity by the time the new capacity is ready to come on line. The opening of Central Buddamonthon Sai 5 will also draw more residents and raise water demand. Tariffs will be the same as that for water above the 300K cum/day (a ~60% discount to the price PWA pays for the first 300K cum/day).
- PTW’s 100K cum/day capacity expansion is also divided into phases. Phase 1 will produce 50K cum/day at a cost of <Bt300mn and will come on stream by end-2014. Its current plant is operating at 100% now; the new capacity will serve the rapidly growing residential demand in the Rangsit area, where supply is already insufficient during peak hours - and will worsen with the completion of >17,000 condo units - Lumpini Township Rangsit Klong 1 alone has 10,000 units. Tariff on the new and original capacity will be the same.
- The total investment of Bt2.2-2.3bn will be financed by bank loans.
Earnings revision. We raise TTW’s earnings by 14% to Bt2.8bn for 2014 and 13% to Bt3.1bn for 2015, incorporating BoI tax privileges for plant improvement after the flood at TTW’s facility. We raise TTW’s tariff by 5.3% for 2014, higher than the rise in Bangkok’s CPI, as TTW will no longer give a Bt1/cum discount to the PWA. If the discount is kept in place, our forecast would come down by 3% in 2014 and in 2015.
2013 wrap-up. As expected, 2013 core profit grew 3.8% to Bt2.3bn, in line with water sales growth of 2.8% YoY and tariff hike of 4% for TTW and 2.7% for PTW. However, net profit grew at faster pace of 10% due to a one-time gain of Bt113mn from CKP and Bt350mn tax refund for PTW.
Maintain BUY, TTR attractive at 30%. We roll PT over to end-2014, and it remains at Bt12/share, as we had already put the new capacity in valuation. We continue to like TTW for its resilient operations, limited downside risk and as a dividend play. In the near term, good growth throughout the year could be a share price catalyst. TTW has sound fundamentals and in our view is a good investment.