Manila Water Company (PSE: MWC)

Manila Water Company (MWC, the “Company”) entered into a 25-year Concession Agreement (CA) with Metropolitan Waterworks and Sewerage System (MWSS) on February 21, 1997 and was renewed for another 15 years in 2009. MWC’s CA with MWSS will expire on May 6, 2037. The Company had served 99% of the customers in the East Zone up from only 26% at the start of the CA. The Company spent over P58.7 billion in the span of 15 years (from 1997 to 2012) on capital expenditures and plans to spend P66.4 billion from 2011 to 2015. In 2012, MWC supplied approximately 1,333 million liters per day (mld) in the East Zone operations and billed 427.3 million cubic meter (mcm) [1,333 mld x 320 days / 1000 liters].

MWC Expansion Efforts

MWC won a $ 15 million contract in Ho Chi Minh City (HCMC), Vietnam in 2008 for leakage reduction in the area. As lucrative as the contract may sound, MWC did not profit much as shown below: [1]

MWC1

MWC’s 3-year presence in Vietnam allows the Company to learn about the business climate in the country and it paved way for more investments in Vietnam. In December 2011, MWC purchased 49% of Thu Duc Water B.O.O. Corporation (TDW) the largest private bulk water supplier in HCMC through Thu Duc Water Holdings, Pte, Ltd. a wholly owned subsidiary of MWC incorporated in Singapore. TDW has a 300 mld bulk water supply contract with Saigon Water Corporation under a take-or-pay agreement. In the third quarter of 2012, MWC purchased 47.35% of Kenh Dong Water Supply Joint Stock Company (KDW) another bulk water supplier in HCMC. A 200-mld Kenh Dong bulk water treatment plant is currently under construction and will be completed and operational by the second quarter of 2013.

In December 2009, MWC entered into a Concession Agreement with the Tourism Infrastructure and Enterprise Zone Authority (TIEZA, formerly Philippine Tourism Authority) for the provision of water and wastewater services in the Island of Boracay. MWC participation in Boracay was through Boracay Island Water Company (BIWC) an 80-20 joint venture with TIEZA where MWC has 80% interest.

In September 2009, Laguna AAAWater Corporation (LWC) entered into a 25-year Concession Agreement with the Province of Laguna (POL). LWC is a 70-30 Joint venture with POL in which MWC has the majority interest.

In December 2011, MWC purchased Veolia Water Philippines and Philippine Water Water Holdings which owns 100% of Clark Water Corporation (CWC) which has a 25-year water concession in Clark Freeport Zone in Angeles, Pampanga until October 2025.

In the first quarter of 2012, MWC, through Northern Waterworks and Rivers of Cebu (a consortium of MWC and Viscal-Gaisano group), signed a Joint Investment Agreement with the Provincial Government of Cebu for the development and operation of a bulk water supply system in the province. A 35-mld capacity treatment plant and transmission lines is on-going and is expected to be completed in the fourth quarter of 2013. The water will be sourced from the treated surface water extracted from Luyang River in the town of Carmen.

Below is the billed volume of MWC’s operations outside the East Zone:MWC2

Comments:

With MWC East Zone concession providing 90% of the Company’s revenues and considering that MWC’s crown jewel will only last until 2037, it would be fairly easy to estimate MWC’s intrinsic value. Assuming that the 9.3% appropriate discount rate [2] for 2008-2012 will be used as a discount rate for the remaining 24 years of the concession and the concession will generate a smoothen cash flow of 7 billion, we will arrive at an intrinsic value of 67 billion or 33.47 per share.

MWC is properly valued by the market, unless MWC generates substantial revenue from other water operations.

Sources:

  1. MWC SEC 17-A 2012, Note 24, p. 149, http://www.pse.com.ph/resource/corpt/2013/MWC_17A_Dec2012.pdf
  2. MWC SEC 17-A 2012, The Concession, p. 7, http://www.pse.com.ph/resource/corpt/2013/MWC_17A_Dec2012.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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