This water supply company shows its commitment to provide quality services through its expansion and maintenance initiatives. However, its as-reported data doesn’t seem to see this as a profitable opportunity.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Newsletter:
Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus
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In 1997, water and wastewater services in Metro Manila were divided exclusively between two companies after a 25-year exclusive concession by the Philippine government.

Under the said concession agreement, Maynilad Water Services, Inc. was given the right to provide its services to the western side of Metro Manila, while Manila Water Company, Inc. (MWC:PHL) would be in charge of the eastern side. This agreement was extended by another 15 years in 2009, so both companies can enjoy the exclusive benefits until 2037.

Since then, Manila Water has provided water treatment, water distribution, sewerage, and sanitation services to more than seven million people in the East Zone, as well as to parts of Rizal province.

Aside from the Manila concession, Manila Water also provides services in different parts of the country through its subsidiaries under its holding company, Manila Water Philippine Ventures, Inc. (MWPV).

Similar to most companies, Manila Water saw customer demand recover in 2022 due to the resumption of economic activities in the country. As a result, the company saw consolidated revenues grow by 11% from PHP 20.5 billion in 2021 to PHP 22.8 billion in 2022.

In addition to the increase in connection fees and the boost in revenue seen in the non-residential segment, Manila Water had multiple initiatives to ensure continuous growth in providing quality services during the year.

In March 2022, MWPV acquired full ownership of Davao Del Norte Water Infrastructure Co., Inc. This acquisition allowed the company to take advantage of expanding its market reach in Visayas and Mindanao. Projects under this subsidiary are expected to benefit almost 300,000 people located in Tagum City.

Moreover, bulk of capital expenditures for the next few years have been allocated to continue multiple expansion projects such as the construction of the Antipolo Water System, expected to be completed in 2025.

Other parts of their capital expenditure plans include service improvement projects as well as securing water supply. This includes the regular rehabilitation of mainlines, installation of redundant water lines, as well as the construction of emergency reservoirs.

Taking the increasing population into consideration, the company is also making sure that the water and wastewater services it provides in the East Zone grows at an annual rate of 2%-3%. A service improvement plan focused on water security and sustainability is also in the works to avoid potential water shortages in cases of natural calamities.

Finally, Manila Water has committed to build 12 more sewage treatment plants in an effort to improve the conditions of the water environment and to advocate environmental sustainability.

Manila Water’s earning power is stronger than you think

Despite its solid initiatives, Manila Water seems to generate underwhelming returns, with ROAs only reaching 3% in 2022.

In reality, the company achieved above cost-of-capital Uniform returns at 6%.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies interest expense.

According to PFRS, interest expense is an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.

For example, in 2022, Manila Water recognized an interest expense of PHP 2.8 billion, 47% of as-reported net income of PHP 5.9 billion. When we add the PHP 2.8 billion back to earnings, because it is not an operating expense, net income increases. This adjustment, along with the other adjustments made, represents a 6% Uniform ROA.

Manila Water has a more efficient business than you think

The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover has been consistently lower than Uniform asset turnover for the past decade, giving the organization a lower asset efficiency score than actual economic measures indicate.

Additionally, for the past sixteen years, as-reported turns have consistently been less than Uniform turns, which has distorted the market’s assessment of the firm’s historical asset efficiency levels.

SUMMARY and Manila Water Company, Inc. Tearsheet

As our Uniform Accounting tearsheet for Manila Water Company, Inc. (MWC:PHL) highlights, the company trades at a Uniform P/E of 11.7x, below the global corporate average of 18.4x and its historical P/E of 16.6x.

Low P/Es require low EPS growth to sustain them. In the case of Manila Water, the company has recently shown a 757% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Manila Water’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 18% and 11% in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Manila Water’s PHP 17.30 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to decline by 4% annually over the next three years. What sell-side analysts expect for Manila Water’s earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is in line with the long-run corporate averages. Additionally, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a moderate credit risk.

Lastly, Manila Water’s Uniform earnings growth is above its peer averages, while its Uniform forward P/E is below its average peer valuations.

About the Philippine Markets Newsletter
“Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under IFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one Philippine-listed company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earnings Tearsheet on a Philippine company interesting and insightful.

Stay tuned for next week’s Philippine company highlight!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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