PBA ... Nov11

Mercury Securities Research Report


PBA’s 3Q/FY11 results (quarter ended 30th September 2011) were generally in-line with our earlier expectations.

“3Q Results in-line with expectations”
PBA’s 3Q/FY11 revenue of RM59.3 million was higher by 20.8% y-o-y. Group NPAT (net profit after tax) of RM5.8 million was higher by 139.6% y-o-y. The better performance was mainly due to the improved sale of water revenue from trade consumers.
“Strong demand from trade consumers”
However, the group’s 3Q/FY11 revenue had decreased by 8.2% from the preceding 2Q/FY11. The group NPAT had also decreased by 52.4% q-o-q as compared to the preceding 2Q/FY11. This was largely due to the lower levels of revenue from trunk main contributions (TMC).

OUTLOOK/CORP. UPDATES
In tandem with growth in the domestic economy (in GDP terms), we expect that the group’s water revenues would grow as well. Water is a relatively inexpensive expenditure, and we foresee that the demand would grow steadily, especially for trade (commercial / industry) users. Nevertheless, PBA’s management is aware and mindful of both economic conditions and escalating costs.

“Steady domestic demand growth”
Malaysia had reported a reasonable 2Q/2011 unemployment rate of 3.0% and CPI of 3.4% (September 2011). On 11th November 2011, Bank Negara Malaysia (BNM) had maintained its accommodative overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia’s GDP growth in 2Q/2011 amounted to 4.0%, amidst volatile global financial markets and also economic weakness in the developed regions (US, Europe and Japan).

The influx of FDI (foreign direct investment) into various high-tech and manufacturing sectors within the state of Penang would lead to higher water usage by trade consumers. According to PBA’s FY10 annual report, there are more than 67 thousand registered trade consumers in Penang State, while registered domestic users number around 440 thousand. In 2010, trade consumers accounted for 40.2% of water consumption in the state.

“New Costs”
In June 2011, PBAPP (Perbadanan Bekalan Air Pulau Pinang S/B) a wholly-owned subsidiary company of PBA, had been charged by the Penang State Government for Water Intake Fees at RM0.03 per cubic metre of production volume with effect from 1st January 2011 (i.e. backdated). The amount of water intake fees for the year is estimated by PBA to be approximately RM10.9 million. This fees is payable for the period 2011-2013.

PBAPP was awarded by the Minister of Energy, Water and Communication in June 2011 a Service License issued pursuant to Section-9 of the Water Services Industry Act (WISA) 2006. The License shall be effective from 1st June 2011 to 31st May 2014. The License Fee is calculated based on 1% of the revenue from the sale of water by the subsidiary.

In June 2011, PBAPP had entered into a Facility Agreement and a Leasing Agreement with Pengurusan Asset Air Bhd (PAAB) to enable PBAPP to carry out water supply services on the land leased from PAAB. The amount of leasing charges is RM14.56 million per annum for a period of 45 years with effect from 1st August 2011. The land leased has a net book value of RM655.3 million at the date of the agreements. To recap, PAAB would act as the “debtor” for federal loans. In return, PBAPP would alienate some of its land to PAAB and pay an annual lease to PAAB.
“Working with PAAB”
Upon notification by PAAB and subject to PBAPP’s ability to secure the costs of fund equivalent or lower than that secured by PAAB and provided the approval of Suruhanjaya Perkhidmatan Air Negara (SPAN) has been obtained, PBAPP shall have the first right to construct, upgrade, and refurbish at its own costs and expense the Water Assets and New Water Assets for water supply services. PBAPP, being the state water operator, would be allowed to focus solely on providing water treatment and distribution services, while the Malaysian Federal Government will be fully responsible for the source work of water supply projects.
“Share buybacks”
During the nine month period ended 30th September 2011 (9M/FY11), PBA repurchased 1,000 of its issued shares from the open market at an average price of RM0.99 per share (9M/FY10: 1,000 shares at average price of RM0.85). The shares repurchased are being held as treasury shares in accordance with Section 67A of the Companies Act, 1965.

VALUATION/CONCLUSIONPBA’s Board of Directors had declared an interim tax exempt dividend of 3.5% (1.75 sen gross) amounting to approximately RM5.8 million for its FY11 ending 31st December 2011.
PBA’s shares will trade ex-dividend on 25th November 2011. The last date of share lodgement is 30th November 2011 while the dividend would be payable on 23rd December 2011. Meanwhile, we expect that PBA would be giving a dividend payout of around 30% for its FY11 and FY12.

“Reasonable dividend payouts”Even with an adjusted beta (correlation factor) of 0.68 to the KLCI, PBA (+13.5%) has managed to outperform the KLCI (-3.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings in the Middle East/North Africa, sovereign debt issue in Europe, debt ceiling issue in the US and Tohoku natural disaster in Japan. Nevertheless, as PBA is not a large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Maintain Buy Call”
Based on our forecast of PBA’s FY12 EPS and an estimated P/E of 10 times (within its historical range), we set a FY12-end Target Price (TP) of RM1.16. This TP offers a 15% upside from its current market price. Our TP for PBA reflects a P/BV of just 0.55 times over its FY11F BV/share. Meanwhile, the local Water Services sector’s average P/E and P/BV is 17.8 times and 2.3 times, respectively.

“Wise long-term planning”PBA’s management had prepared-well for the coming years, with the implementation of new trade tariffs and WCS (Water Conservation Surcharge). It has also planned ahead in terms of capital expenditure (capex) and measures needed to lower NRW levels. We are pleased that PBA practises an open-tender system for its maintenance, machinery, pipe-laying and even for its annual report. In the long run, this practice usually leads to improved cost savings.

“Undemanding valuations”
We find that PBA’s P/E and P/BV valuations are quite undemanding within its sector, while it has reasonable dividend yields. Meanwhile, the group’s gearing levels are very minimal, and we expect that it would turn into a net cash position during its FY11.

“Risk factors”
Nevertheless, PBA’s businesses also face routine risks such as a possible slower rate of economic growth, weak trade consumer demand, foreign exchange fluctuations and rising costs — e.g. electricity, oil/gas, water treatment (chemicals), pipe replacement (steel/ductile iron/others) and bottling (plastic). We also note that PBA holds investments in the equity markets that are managed by external fund management companies. As in any investment, there would be risks from equity market fluctuations as well.