Why I will buy Manila Water (MWC - P6.50)

I have short listed Manila Water in my buy-list this week. The stock looks interesting at current levels. Here are my arguments:

1.) Manila Water is a utility company with a growth stock like earnings performance. Earnings for the company is expected to grow 20% this year to P2.4bn. In 2005, the company reported a net income of P2.0bn.

2.) Earnings growth for Manila Water will be driven mainly by 2 factors: improvement in systems loss ratio and growth in user base. Since 1997, management was able to decrease non-revenue water from 65% to current 35%. The target is to bring non-revenue water to below 30%. On the other hand, total connections (number of users) are expected to grow by 10% this year to 500,000.0 users.

3.) The current situation of Manila Water is reminiscent of MERALCO (MERB – P18.5) in early 90s. MERALCO, was able to deliver double-digit growth rates and thus became one of the market darlings during those times.

4.) Manila Water is an emerging utility play vice MERALCO. The electric company has several issues to resolve before investors will start looking into it. This leaves the market with only Manila Water as a “pure play” utility counter. Besides, being an Ayala subsidiary is an added bonus. Ayala companies are well managed and almost always trade at a premium to market.

5.) Manila Water trades at 5.4x PER and 4.1x Cash Flow. The Philippine market trades at 15x PER. Considering that Manila Water has both stability and growth in its earnings picture, the stock should be trading at a much higher valuation.