TRIS Rating Co., Ltd. has affirmed the company rating of Eastern Water Resources Development and Management PLC (EASTW) at “A+” with “stable” outlook. The rating reflects EASTW’s strengths as the sole raw water provider with a comprehensive pipeline network in the Eastern Seaboard, favorable growth prospects for the tap water business, and a strong financial profile. The rating is further supported by the high barriers to entry, reliable cash flow, and low operating risk. EASTW’s strengths are partially constrained by the large capital requirements, the unpredictable effects of climate change, customer concentration risk, and government regulations covering water resources management, which are not yet well-defined.
The “stable” outlook reflects the expectation that EASTW will continue to sustain its cash flow generating capability and that business operations will not be adversely impacted by any shifts in government policy. EASTW is also expected to expand its business with a conservative leverage plan and well-disciplined monitoring.
TRIS Rating reported that EASTW was founded in 1992 and became the sole raw water provider in seven provinces in the Eastern Seaboard following a Cabinet resolution to privatize development and management of raw water distribution systems. The company leases and operates four water pipeline networks, previously overseen by the Ministry of Finance (MOF), serving Chonburi, Rayong, and Chachoengsao provinces. In addition, the company provides tap water in nine service areas. For the fiscal year ending September 2008, EASTW’s total revenue was Bt2,379 million. Raw water sales accounted for 69% of total revenue, while tap water services represented 22% of the total. When the 2008 fiscal year ended in September 2008, EASTW switched to a December fiscal year end.
EASTW’s raw water sales for fiscal year 2008 grew 9% from a year earlier, due to increases in both water demand and tariffs. Since inception, the company’s business fundamentals have remained strong as raw water demand by industrial users on the Eastern Seaboard is fairly stable. However, the economic slowdown adversely affects raw water demand, especially for industrial users. For the period during October-December 2008 and the first quarter of 2009, raw water demand dropped 8% and 10% year-on-year (y-o-y), respectively. However, thanks to the increased average tariff which, at some extent, helps sustain the revenue, the company reported a 1% drop in raw water sales for the period of October-December 2008 and a 9% increase for the first quarter of 2009. In contrast, the tap water business remained strong, posting 15% sales growth for fiscal year 2008 and 8%-12% y-o-y growth for the next two consecutive quarters. However, EASTW is exposed to customer concentration risk as Provincial Waterworks Authority (PWA) and Industrial Estate Authority of Thailand (IEAT), the major shareholders and key customers, contributed around 65%-70% of total sales during the last five years. Both PWA and IEAT have bargaining power when negotiating the purchase price, especially the raw water tariff. The company has offered some discounts for 2008-2010.
TRIS Rating said, given the extensive networks and the capital intensive nature of the business, EASTW is unlikely to face a threat from any large competitors in its raw water service coverage area for the foreseeable future. EASTW’s pipeline network is fully connected which enhances its ability to efficiently manage and allocate water from various sources to its clients. However, climate change could affect the volume of rainfall, posing a major threat to the company’s business profile. The water supply will be further strengthened after the completion of the Prasae-Klongyai project. This project could add another 80 million cubic meters (cu.m.) of water channelled from the Prasae reservoir. The prospects for tap water services remain promising due to the likelihood that new tap water projects will come up for bid.
EASTW’s solid financial performance is due to a well-protected business with reliable sources of income. Operating margin before depreciation and amortization rose from 45.6% in fiscal year 2007 to 52.6% in fiscal year 2008 and 58.1% for the first quarter of 2009. The significant improvement in profitability was due to higher margins in the tap water business, divestment of a loss-making business, and a higher average water tariff. Operating cash flow has risen steadily during the last seven years. Funds from operations (FFO) increased from Bt437 million in fiscal year 2002 to Bt923 million in fiscal year 2008. Total debt decreased significantly from Bt4,535 million in fiscal year 2007 to Bt2,936 million in fiscal year 2008. The drop came as a result of the early redemption of debentures and no major investments during the last two years. As a result, cash flow protection, as measured by the ratio of FFO to total debt, improved from 17.4% in fiscal year 2007 to 31.4% in fiscal year 2008. EASTW reported a FFO to total debts ratio of 9.4% (non-annualized) in the first quarter of 2009. Leverage also improved significantly as shown by a drop in the ratio of total debt to capitalization from 49.1% in fiscal year 2007 to 32.9% in fiscal year 2008 and remained fairly stable afterward. The expected rise in debt to finance planned capital investments will continue to weigh on the company’s credit profile since the company is likely to enter an investment cycle. EASTW anticipates capital spending to average Bt1-Bt1.5 billion annually over the next few years, partly to finance the third pipeline in Map Ta Phut area and expand the tap water business. Moreover, there is a possibility that EASTW may acquire the Prasae-Klongyai pipeline from Royal Irrigation Department (RID), with a project cost of Bt1,680 million, said TRIS Rating. -- End
Company Rating: Affirmed at A+ Rating Outlook: Stable
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