Shining example of a successful privatization

Manila Water Corp. (MWC) debuted on the Philippine Stock Exchange last Friday and closed at P6.90 or 6.2 percent higher than its IPO price of P6.50. MWC gained as much as 17 percent, registering an intraday high of P7.60, but the strong opening was met by profit-taking as the day was marked by broad-based correction in the market with the Phisix declining by 2.4 percent. A number of reasons triggered the market decline:

1) The delay of the much-awaited VAT bill;

2) The decline in global equity prices due to the record-rise in crude oil prices; and

3) Threat of possible terrorist attacks following the failed prison escape by suspected terrorists over the weekend.

Going back to MWC, the closing price of P6.90 translates to a PE multiple of 7.3x for 2005 and an EV/EBITDA of 6.0x. We continue to maintain our positive outlook for this stock despite the initial profit-taking, which was mainly market-driven.

The following are the reasons why we like this stock:

1) Valuations are attractive (Both to regional peers and the market)

2) Demand

There was a strong reception in the IPO roadshow of MWC indicated by an oversubscription of 15x to 18x. While it still remains to be seen whether this will translate to actual market buying, the oversubscription is indicative of investor sentiment to the stock’s valuation and growth prospects.

3) Efficiency and possible upward earnings revisions

Management has been successful in improving operating efficiency of the company. It has spent significant amount (over P5 billion the last three years) in terms of capital expenditures alone. This enabled MWC to decrease its receivables and Non Revenue Water (lost revenues due to leakage and pilferage) by 16 percent from the time it received the concession in 1997. In fact, its current NRW levels (47 percent for full year 2004 and 43 percent as of December 2004) is already three years ahead of schedule in terms of its commitment targets to the government.

These improvements would effectively result in improvement in margins and possible upward earnings revisions going forward.

Hence, we believe that MWC is a stock that has fundamental value and has significant growth prospects — and not just worth for a "quick buck" contrary to what many believe.