05/10/2020 - 17:04
BWE unrated note: Capacity expansion to enable growth
Capacity expansion to enable growth
BWE is the third largest supplier of water in Vietnam. The company currently provides clean water in urban areas (100% market share) and suburban areas (80% market share) in Binh Duong province. BWE’s daily water supply capacity of 480,000m3 makes it the third largest in Vietnam, following SAWACO (1 million m3) and HAWACO (580,000 m3). The capacity of its integrated waste treatment system—the only one in Binh Duong province—is fully utilized at 2,530 tons.
The company is expanding its daily water supply capacity to 629,000 m3, up by 30.0% from the current level, which will make it Vietnam’s second largest water supplier in terms of capacity. BWE has also expanded its pipeline system, doubling its integrated compost fertilizer capacity.
Water demand for production in Binh Duong is expected to grow strongly. In 2019, Binh Duong province ranked third nationwide (after Hanoi and Ho Chi Minh City) in attracting FDI, with total capital of more than US$3.1 bn, up 50% YoY. With developing infrastructure and proximity to HCMC, we expect Binh Duong province to continue to attract manufacturing-driven FDI and hence higher water demand for industrial production.
High profitability outperforms the industry, with YTD ROE of 18.7% compared to the domestic water industry average of 14.4%. This is partly due to its high financial leverage relative to industry peers, which is due to its expansion plans as it seeks to ramp up capacity ahead of increasing demand.
Reasonable dividend policy. BWE plans to pay a cash dividend of 12% of par value in 2020, equivalent to a dividend yield of c.4.5% and a dividend payout ratio of c.45%. We believe that this dividend policy is quite reasonable given that the company is investing heavily to increase its water supply capacity. However, the dividend could improve further after the expansion projects are completed.
Valuation. BWE is trading at 9.7x 2021E P/E based on Bloomberg consensus, lower than the regional P/E median of 13.3x. We do not have an investment recommendation but this valuation appears reasonable given that BWE is currently on track to become the second largest water supplier in the country.
