The H118 results and publication of the full interim report confirmed China Water Affairs Group’s (CWA) strong growth trajectory. In our view the outlook for the company remains positive. We have increased our EPS and DPS forecasts for CWA and raised our fair value from HK$6.7/share to HK$8.0/share.
Interim figures from CWA demonstrated a continuation of the strong growth trajectory that has been evident in recent years. Group revenue rose by 16.3% to HK$3,514m, while operating profits (excluding FV movements in derivatives and investment properties) rose by 40.7% to HK$1,344m. EPS (basic) increased by 22.9% to HK28.43 cents. Driving overall growth was the rise (+10.4%) in revenue and segmental profits (+22.8%) at the key water supply and construction business (c 94% of group revenues). The water business continues to benefit from the widespread adoption of the public-private partnership (PPP) model and the integration of urban and rural water systems. A turnaround in the performance of the associate business and tight control of costs, which fell by 6.2% to HK$287m despite the top line growth, also helped boost profitability
We expect the outlook to remain positive for CWA and the business to continue to grow. We believe this growth will be generated by both the geographical expansion of the business within China, facilitated by the factors cited above, as well as growth from the existing operations, underpinned by increases in tariffs and consumption. CWA plans, in part, to fund this expansion by recycling capital from the disposal of non-core businesses. Surplus capital generated by disposals could also be used to boost dividend payments, although we do not include this in our forecasts.
Following the publication of the interim report we have adjusted our earnings forecasts for FY18 and beyond (FY18e EPS +8% to HK$0.649). Given CWA’s announcement of its intention to pay not less than 30% of basic EPS as a DPS, we have also raised our DPS forecasts (FY18e DPS + 64% to HK$0.196). We have revisited our valuation, which increases from HK$6.71/share to HK$8.0/share. At our revised value of HK$8.0/share, CWA would trade on a P/E multiple of 12.3x and an EV/EBITDA multiple of c 7.8x. We believe such multiples are sustainable for a company that we expect to grow EPS by c 14% CAGR in 2017-20e.