On October 2008, teams representing their respective Universities will meet and compete for the chance to advance to the 2nd round in the Investment Research Challenge. The winner of the 2nd round shall represent the Philippines in the Regional Competition. Philippine Teams will have to produce a Research Report on Manila Water Company. The Challenge will require teams to analyze the Fundamentals and Financial Statements of the company.
The Regional Competition will be held in Singapore on February 2009.
In April 2009, the Finals will be held in London.
Manila Water Company
Manila Water Company is the company to be analyzed for the 1st round of the competition. This is a Philippine listed corporation in the Utilities Industry and it provides Water and Sewerage services to 5.1M residents of Metro Manila. In 1997, MWC had only 3 million customers and these customers did not have 24 access to water.
"Manila Water's future growth will be focused on the improvement and expansion of water services in the East Zone, its core business area. Growth in this area is expected to come from the increased demand brought about by the population growth and expansion of water and sanitation service commitments to unserved and underserved areas. The Company also regularly explores the possibility of bringing its services in areas outside the East Zone. Manila Water is considering new concessions, acquisitions or partnerships with other water districts, sanitation projects as well as management service contracts in selected countries in the Asian region." - MWC website
Bulls say:
Bears say:
Please go to http://www.manilawater.com/ for more information.
Please go to http://www.pse.com.ph/ and read the Company Disclosures of MWC and peers.
More details will be posted on this blog. Note that all views and comments in this posting are not the official views of CFA Philippines.
You are welcome to post your questions. Check out the comments section for advice and guidance from your friends at CFA Philippines!
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Be sure you can calculate the ff. ratios and measures:
1. Market Capitalization
2. Return on Equity
3. Return on Assets
4. Gross Profit Margin
5. Net Profit Margin
6. Price/Earnings Ratio
7. Cash Flow from Operations
Go Team CFA Philippines!!
Manila Water bags Vietnam project
Posted: Friday July 4, 2008
Manila Water bested four other international water companies for a 5-year contract, Performance-based Leakage Reduction and Management Services in Ho Chi Minh City, Vietnam.
Mr. Antonino T. Aquino, president of Manila Water, feels very confident about this exciting new development, “This is a significant step towards Manila Water’s foray in the international dynamic arena of water and wastewater business. Our management and technical team have developed high competent skill levels particularly in increasing the level of efficiency of water system networks that can be used in various development projects worldwide.”
Manila Water will undertake construction works and leakage reduction services under the Ho Chi Minh City’s Non-Revenue Water (NRW) Management, the Sub-Project of the Vietnam Urban Water Supply Development Project. It will be funded through a loan from the International Development Agency of the World Bank.
The contract is valued at USD 15 Million and was approved and accepted by HCMC Peoples’ Committee through its Saigon Water Corporation, the government corporation in-charge of managing the water system for Ho Chi Minh City.
Manila Water will be deploying a team of technical experts to Vietnam which will be supported by a number of Vietnamese local subcontractors. The project will allow Manila Water to share its expertise in the field of leakage reduction and District Metering Area (DMA) management. As the concessionaire of the east zone of Metro Manila for the past 11 years, Manila Water has significantly reduced the non-revenue water (NRW) level from 63% in 1997 to 20% today, unprecedented in the history of the water supply in Metro Manila.
“The Vietnam project is a significant milestone not only for Manila Water but for the country as well. It makes us truly proud that what we have done in improving the system of the East Zone can now be tried and replicated in our Asian neighbors,” Aquino added.
MWC Company website
Investors look for:
1. Stability
2. Predictability
You have to demonstrate that the company offers both of these to its equity investors.
Maynilad Water Services Inc. news:
In its rate rebasing exercise, MWSI has submitted a business plan to the regulator that shows non-revenue water (NRW) declining to 40% in five years,
and billed volume growing double-digit every year. For 2008, Maynilad expects its billed volume to grow 15% versus last year. Future revenues will be dependent on attained volumes and the tariffs to be approved in the
current rate rebasing exercise.
MWC's main business is governed by its 25 year concession agreement with Metropolitan Waterworks and Sewerage System. MWC entered into this agreement in 1997.
"How to write a research report" seminar/workshop on September 10, 2PM to 6PM at Citiseconline's Training Center, 24F PSE Centre, Exchange Road, Ortigas Center, Pasig City. Please confirm your attendance with Rizchelle: Rizchelle Sampang-Manaog through email (secretariat@cfap.cfasociety.org) or telephone 3971010
Questions that you may want to answer:
1. How efficiently does the company produce income relative to the ff.:
a. Peers - same country
b. Peers - in Region or similar economies
c. Competitors
2. What are the Unique Competitive Advantages of the business?
3. Will the business be thriving 10years down the road? Why?
4. How much more in capital expenditures are required in the next 5 years?
correction as of 26 August 2008, it closed at the price of Php 17.75
At the invitation of Mr. Bambi, I present to the blog my analysis of Manila Water. Feel free to make any comments or corrections. Here are my insights:
Manila Water Company (MWC)
It is a public utility company owned by the Ayala Group of companies. Manila Water is the Eastern Concessionaire water distributor for Metro Manila. It listed publicly on March 18, 2005 with an opening price of Php 7.50. As of August 26, 2008, it closed at Php 17.75, that’s 136.67% gain in share price from its IPO, with an annual rate of 24.03%.
I did a bit of research and analyzed the financial statements of MWC. From what I have researched, MWC would seem an interesting stock to hold on. Here are the reasons as to why it seems like a good buy: (*I used data from the MWC website and Reuters for industry ratio comparison)
According to the MWC website, the demographics of the east concessionaire area have been increasing from 325 thousand households in 1997 to 986 thousand households in 2007. Logically, the demand for water has also increased from 440 million liters per day to 1040 million liter per day for the past 10 years. Non-Revenue water (i.e. revenue loss either through leaks or theft) also has been declining from 63% in 1997 to 23.9% in 2007. For the past 10 years, Manila Water has also been able to increase its 24-hour water availability from 26% of 3 million customers in 1997 to 99% of 5 million customers in 2007. If the trend would persist then future earnings will continue to improve and grow.
With that successful operational turn around we therefore see that earnings have been growing with a CAGR 6.19% starting from 2005 to 2007. It has been giving cash dividends to its shareholders since the year it has been publicly listed, with an average estimated dividend yield 2.27% per annum.
Ratio Analysis:
Net profit margin has been more or less steady at an average of 30.49% for the past 6 years. That’s a huge profit margin given an industry average of 5.28%, most likely net profit margin would continue to hover around that figure given that water is a free resource with little COGS used to distribute it.
The 6-year average of asset turnover is 33.24%, quite low given the industry average turnover of 53%. However, with a high net profit margin, it is normal to have low asset turnover.
Financial leverage is generally decreasing given a 6-year history. Please note that I couldn’t get the industry average. So I don’t know if it is quite high or low compared to the industry.
Return on asset seems to be falling a bit given a 6-year history, however a 10.06% average is more than 3 times the industry average of 3.10%.
The 3-year average return on equity from 2005-2007 is 19.38%. This figure is above average given the industry average of 13.8%
All in all, Management is doing well in running the business and keeping shareholders happy.
I also did a quick check on MWC internal liquidity. It seems to me that MWC is able to pay its short-term obligations with current ratio for the past 3 years a little above 1.
Long-term debt though concerns me, with consistently high ratios above 40% for the past 3 years. However, checking industry averages again a little above 40% is low given the industry’s 161.25%!
Checking the price movement of MWC, I find it a little to expensive right now, just by using simple P/E history. Current P/E ratio is 16.75, nearing its all time high of 18.16. Book value per share has been increasing in the last 3 years, which is good. However, price to book value is high with a current value of 2.85 (Note: I used the last closing price divided by 2007’s book value per share of 6.22). This is higher than the industry average of 1.92, so it seems to be expensive relative to other companies.
Conclusion:
Doing a quick check on the fundamental ratios of MWC, I have analyzed that it is growing steadily well. It appears to be well run from its figures, with consistently above average ratios compared to industry average in almost every ratio I used. It seems a very good company to hold on to, take note though not enough data is readily available, it only made its IPO in 2005, and so one cannot get the full picture of the company’s past performance.
Also given that the current price is nearing its historically high P/E ratio and is trading at higher price-to-book value than industry average; I would not see this as a buying opportunity. I think it is better to hold than bite with the market as of now. The market has already priced in the fundamentals of MWC from my analysis. Seeing that it is a utility company therefore a defensive stock, it would perform relatively better in this volatile market. I’ll wait until I see a buying opportunity when the price of MWC tumbles in the future.
Jeremy,
Please compute for the Market Capitalization of MWC.
As of August 26, 2008 closing
MWC Share Price: Php 17.75
Outstanding Shares: 2,004,497,966
Market Capitalization: 35,579,838,896
Research on how many classes of shares does MWC have and so, how many shares should be used in the computation for Market Capitalization.
MWC Shares
There are two types of preferred shares:
PPS- Voting-participating preferred shares, par value Php .10
RPS- Non-voting Redeemable preferred shares, par value Php 1.00
Then they have common shares (with voting participation), par value Php 1.00
Under the Dividend Policy of Manila Water
PPS shareholders will get a fixed 10% dividend per annum on their total par value (note: par value of one PFS share is Php .10), in addition they also get 1/10th of dividends paid out to common shareholders. They receive a total of one vote per PPS share they own, however, they only come second to RPS shareholders when it comes to dividend payout. In addition, PPS aren't convertible and not subject to mandatory redemption.
RPS shareholders are currently entitled to 8% dividend per annum of their total par value (par value for one RPS share is Php 1.00). However, that dividend yield is still subject to the rate change at the discretion of the Board. Also, they do not have voting participatory rights (except when law provides them), shares are non-convertible, and are considered non-participating, though it is redeemable at times of Board's determination. In the prospectus, RPS will be redeemable in 5 equal tranches in each anniversary of the date of RPS issuance.
Common shareholders will get 25% of prior year's net income, payable semi-annually on March and September. However, that 25% figure isn't fixed and can be change at the Board's discretion. They are entitled to one vote per share.
In the event of dissolution, liquidation, and bankruptcy; RPS shareholders will get preference when it comes to liquidation, they will get priority in the payment of accrued and unpaid cash dividends and the payment of par value of RPS from the liquidized assets. Next priority will be PPS shareholders and they will get the payment of accrued and unpaid cash dividends plus 1/10th of what would be subject to common shareholders. Lastly, common shareholders will get what will be remained after payments to preferred shareholders. MWC has an employee and executive stock policy and as to the terms of their policy will be given common shares.
As of December 31, 20007 AR Ending:
Authorized and issued preferred shares: 4,000,0000,000
However only 900,000,000 are listed in the Shareholder equity statement.
PPS= 400,000,000 shares
RPS= 500,000,000 shares
Authorized common shares= 3,100,000,000
However listed common shares= 2,005,443,965 shares
According to PSE website, outstanding shares = 2,004,497,966 shares are trading.
Therefore I assume that the difference between listed common shares and outstanding shares (945,999 shares) are restricted shares.
As closing of August 29, 2008 MWC share price was Php 17.75
Market capitalization is share price x outstanding shares = Php 35,579,838,897
Can anyone join this competition? Or does each school has its own representative?
Only 5 Universities can join the IRC this year.
These are:
1. Ateneo de Manila Univ.
2. De La Salle Univ.
3. University of Asia and the Pacific
4. University of the Philippines
5. (to be disclosed soon)
CFAP is working hard to invite non-participating schools to observe some training sessions in preparation for the next IRC.
Please get your school or professor to express their interest to join this Competition next year.
when the government privatized the water supply services in 1997, it granted concessions to two companies, the Lopez group (Maynilad group) got the West Manila concession, while a group led by the Ayala group (MWC) got the East Manila concession. Then, the Lopez group bailed out in 2003, returning the concession to the government (see press report). It seems that the Lopez group had mismanaged the concession, notably the foreign currency debt that it took on from MWSS. MWC on the other hand, managed the concession very well. It drastically reduced the portion of non-revenue water, and expanded its coverage. It also invests heavily on sewerage treatment system, thus improving the sanitation of millions of people (see ADB note).
Thus, while political risk exists for public utility companies, the risk to MWC is the opposite of what the Lopez group is experiencing. If anything, I think it would be the government that should worry if the Ayala group does not want to extend the concession.
At the same time, I would be surprised if Ayala group does not want to extend the concession. In 1997, it bidded for both East and West Manila concessions, and since it has done so well in the East, and accumulated the knowledge to run a utility company, it has a lot to gain to continue and even expand its concession area. Ayala can even use its reputation in running MWC to bid for overseas utility projects. Also, since it has invested so heavily in the sewerage system, it would seem strange that they would just turn it over to the government without first getting some return on it.
I think MWC is a good company to promote the concept of investing in stocks for income purpose to potential retail investors. The low participation rate of the general public here in stock trading is probably due to the lack of exposure to stocks, as well as the general impression that stocks are risky. The highly risk-averse nature of the general public can be seen by their panicky response to the fall in the prices of bonds included in some UTIF two years ago. At this time, when stock prices are so low, the income generating capability of some stocks can be highlighted. According to MWC's website,
"Under the Company's cash dividend policy, Common Shares shall be entitled to annual cash dividends equivalent to 35% of the prior year's net income, payable semiannually in the first and third quarter of the year.
Date Cash Dividends per share Total Cash dividend paid to Common (in M pesos)
Sept 2005 PhP 0.070 167
March 2006 PhP 0.105 251
Sept 2006 PhP 0.105 254
March 2007 PhP 0.15 362
September 2007 PhP 0.15 362
"
I have not done the calculation, but I suspect that the return from dividends at the current stock price may be quite attractive compared to bank deposits.
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