[GIG]

If you're into value investing then welcome aboard. Lets talk about stocks we like and why we like them. Let's also teach the newbies of the beauty of value investing. Its a hard sell I know, its hard to compete with day traders style with lightning fast profits ... and losses but lets try it anyway. After all, the best stockmarket strategy by far is value investing.

[bauer]

i like manila water.  the best stock that i have purchased so far based on the following reasons,

1. IPO price at 6.50 per share last 2005
2. cash dividends continually increasing every year that sometimes equivalent to 5% of my acquisition cost.  almost the same rate as time deposit earnings plus the future increase in stock price.
3. good management and transparent financial reports
4. has plans and global perspective like participation in Vietnam and India water projects.
5. Acquired boracay water project
6. Approved extended contract for the metro manila water supply thereby increasing the stability of revenue stream for the next 15 years.

Based on the current premises, this remarkable stock is good to hold for the next 15 years.  i predict its upswing to 50 a share in the next 5 years.

[GIG]

@bauer

Here here! Also my biggest holding. Unfortunately, I've only discovered this gem and begun buying only last july 2009. Im still accumulating the stock though. Basing on 2008 FS, I find its valuation only at 19 - 21 pesos. I'm sure this would increase over time, mag dilang anghel ka sana and the stockprice would reach 50.

Here is what I like about MWC aside from what you have cited above
1. It has been consistently topping its performance benchmarks enabling it to profit more. Before, utilities earn their keep by applying for rate increases which regulated by the government. Now although rate increases still play part in the earnings, utilities can earn more by surpassing performance based milestones. After 2002, the rate rebasing scheme was terminated for MWC. Instead a performance base framework was adopted. MWC will be rated by KPI or key performance indicators and BEM, Business Efficiency Measures. KPI involves MWC being rated according to water service, sewage, sanitation,customer service and the likes. BEM involves being rated on operating expense, income, capex and NRW or non revenue water (wasted water due to pilferage,leaks etc.). Surppassing these benchmarks earns for MWC monetary rewards. Since 2003, MWC was able to topped theses KPI and BEM parameters earning for itself awards and more profits. Basing on these trends, it is highly likely that MWC will continue to increase profits and also continued increase in stock price without waiting for an increase in water rates.

2. Minor things like protection from foreign exchange losses. This was put in place since 2001.

3. Its concession, the East Zone, lies rather in a relatively low elevation negating their extensive use for pumps as compared to the other water utility Maynilad.

Cons

1. Recently though, there was the flood the hit MM. I do not know the impact on these on MWCs equipment.
2. Also the expansions. Every time you have a new expansion like in vietnam and boracay entails certain risks. I will be in a better mood if those things are up and running so we could see their performance.

[bauer]

[thriftyPinoy]

@GIG & bauer: it seems there's a common attraction among fundamental, value investors towards this stock, hahaha! i've got this as well! i'm guilty, though, that upon purchase of this one, i haven't gotten a good understanding of the complex workings of this business. I have this tendency of overrating ROE as the holy grail metric back then; naively, i took a huge chunk just on that basis. i take comfort, though, from your optimism on this stock.

Utilities are kinda tricky to me. I feel there's a lot going-on in this one (by that, i mean there's a lot in its accounts that i don't immediately understand). After awhile, I became more critical and stumbled on the Service Concession Assets under the noncurrent asset accounts of the balance sheet statement. I feel this one needs serious explaining. Making up for almost 67% of its total assets, most, often even all or more than, of its cash earnings are siphoned (sorry for the term) into this thing; compare Cash Flow from Operating Activities against Additions to Service concession assets under Cash Flow from Investing Activities. Sorry if this would sway the discussion a li'l bit off course, but demystifying the nature of this account would benefit everyone

An aside: I really wouldn't be worried if this intangible asset can be liquidated at book value; all the better if premium to that

[GIG]

thriftyPinoy,


Lets try to analyze this. Service concession Asset or SCA consist of the following:

a) present value of total estimated concession fee payments
b) Regulatory maintenance cost pursuant to the Concession Agreement
c) Cost of rehabilitation works incurred

this is as defined at footnote 2 on MWC's FS.

Lets disect the definition. Lets look at the easy part. Item c) cost of rehab works. This would include,I assume, all the repairs and upgrades done to former MWSS facilities like dams, pumping stations, pipes, water treatment facilities etc. Now item a) present value of total estimated concession fee payments must refer to the total fees MWSS would have recieved from the public if it operated the east zone concession area. Lastly b) Regulatory maintanance cost.I dont have a clue about this cost.

If the assumptions holds through, then these are assets that was ceded to MWC as soon as it won the bidding for the east zone concession. After the concession, all these assets would go back to MWSS.  MWC pumps more money into these assets because this is  really needed to improve efficiency and lower NRW. MWC can recover these expenditures by amortizing them during the concession life. Now I think the decision to extend the concession for 15 more years stems from the fact that MWC is pumping lots of cash to these Service concession assets. They needed the extended years to make sure that they get their fair share of profits from these capital expenditures.

I'm not really convince with myself on that explanation, but for now that's the best I can think of.

[bauer]

let me guess this regulatory maintenance cost.

MWSS exist today to regulate the performance or activities of the water concessionaires.  I think MWSS needed funding to perform their function.  in this case, a regulatory maintenance fee might be the source of their funding allocated by each concessionaire.

[thriftyPinoy]

i'm gonna try play devil's advocate, hehehe... SCA looks nice as it's displayed in the books as an asset, but ain't it worrysome MWC's earnings are just flushed into it--which by the very nature of the account, actually a fee, expense, or regulatory maintenance? i mean, just look at accounting period by accounting period, cash is heavily burned into this capex; does it ever end? if it's true that this will eventually go back to mwss at no cost after the contract, what does that leave the shareholders?

[GIG]

I'd like to take a crack at it thriftyPinoy. But before everything else, I'd like to thank you and bauer. You made me look at the statement of cash flow. I really did not put much attention on this before because I do not know how this would show me if a company has a competetive advantage or not and secondly, my expertise on this is very low. Thanks to you guys I feel a notch up on the subject.

Here goes,



                                                  2008     2007     2006     2005     2004
Add to SCA                                   3.5B       3.6B    3.5B      486M     488M
Availment of Long term debt             6.7B       1.2B    4.9B      --         840M
Net cash from Operation                  7B          3.8B    3.6B      3.8B      2.5B

Income b4 tax                               4.2B        3.5B    2.3B      2B         1.3B
Retained earning (unappropriated)     4.7B        4.8B    nodata   4.2B       2.6B


I disagree that additions to SCA suck all earnings. Comparing additions to SCA for the years 2008 -2004, more or less steady at 3B plus. 2005 to 2004 at 400M plus only. Net cash generated for operations as can be seen at the table is increasing. It is only at years 2006 and 2007 which they come close to equaling additions to SCA. During those years starting from 2006 they got the extra cash from loans, as can be seen by the increase in long term loans.

Now how does this affect us shareholders? My take is that additions to SCA are like capex that increases our bottom line profits. As additions to SCA increases, our cash generated from operation and Net income b4 tax also increases. Years before prior to 2006, additions to SCA were responsible for our profits. As these investments "mature", we see a stabilizing or less dramatic growth in Income b4 tax. In 2006 onwards, we put more additions to SCA and our Income before tax responded by moving up also. Coupled with the extension in concession years, I'm expecting more increases in revenues coming from these investments and naturally an ever increasing stock price.

Another assurance of sorts for us shareholders is our retained earnings. This have been healthy and has been growing from 2004 to 2005 and steadied between 2005 - 2008 because of again added capex investments. Appropriated retained earnings of 4B and 2B have given in 2008 and 2007 respectively.

This analysis is good if assuming SCA really are the one increasing our profits. Since there are no significant expense that I can attribute earnings growth, I think this assumption sticks.

[thriftyPinoy]

Nice illustration I'm still under the impression MWC still has a lot to prove, but we'll see. If it's to be the beast i'm after, it should be able to consistently increase net income and operating cash flow way above its capex (i.e. additions to sca, property, plant, eqpt). after all, and this is just my opinion, I, as a shareholder, wouldn't want my wealth accumulate and be realized in depreciable assets and conceptual, amortizable intangibles (what's the point of making money if it's just going to be accumulated there?). Alongside net income, I'm really biased on free cash and it being invested in earning assets.

[GIG]

@bauer

I think your guess on regulatory maintenance cost is right on.

@thriftyPinoy

I seen your other blogs and you talk about ROE being one of your criteria in choosing which stocks to buy. I also do this. Screening for high ROE's proved more fruitful for me in finding good companies to invest in. After ROE's, I go for earnings. Next, I eliminate companies with large debt. I feel I don't have ample expertise analyzing company debt. Then If all goes well, I price the company. Are you guys doing the same?

[thriftyPinoy]

Yes, I screen ROE, then ROA (looking at debt alone is kinda tricky; it's not really a problem if the company's taking on debt as long as it's able to utilize and deploy them for more profits--even if it's 2x equity). Then after that, I look at cash flow, particularly free cash flow (operating cash flow less capital expenditures).

[GIG]

Whats the significance of ROA?

[thriftyPinoy]

[bauer]

guys,

we should always be reminded that water concessionaires will return the ownership to the government including all assets after the period of their contract expires. In this case, contract renewal or non-renewal should be watch-out since more often political consideration is involved.

im happy to note that both concessionaire had extended their contract with the government so we can soundly expect a good return for the next 15 years.

GIG, your right, i keenly watch the debt level of the firms.

for informatio, Ayala recently bought the shares of the foreign partner (British utility i think).  Since the total buy-out is a little vague, my computation is about P38 to 46 per share.  If Ayala bought it this much, it means most likely in the future, the share of MWC will meet that price.  so ayala's holding in MWC had increased already.  maybe we can see the result of the recent transaction in their first quarter report.