Better-than-expected growth in profitability in FY18, a higher than forecast DPS and a favourable market outlook are clearly positive for China Water Affairs Group Ltd (HK:0855). We forecast continuing growth over the next few years and have raised our valuation to HK$10 per share. At that price, CWA would trade on a forward-looking P/E multiple of 13.1x, a c 15% discount to our group of selected peers.
FY18 extends growth trend
CWA posted continuing year-on-year growth in group revenue (HK$7,580m +32.8%), recurring operating profit (HK$2,718m +37.5%) and EPS (71.8c +29.6%). The growth reported exceeded our expectations for both revenue (HK$7,069m), and EPS (64.9c). The performance was aided by tariff hikes, acquisitions and an improvement in the cost to income ratio. The core water business (c 82% of group revenues) saw revenues and operating profits increase by 25.1% (to HK$6,204m) and 30.1% (to HK$2,401.9m) respectively. The DPS was increased to 23.0c (Edison FY18e 19.6c) and represented c 32% of basic EPS. As CWA continues to expand the scope of its operations, net debt rose to HK$7,801m, but the balance sheet remains healthy and the ratio of total liabilities to total assets reduced from 65% to 61%, helped by the recovery of HK$833m from the sale of non-core assets.
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