Moya Holdings Asia - RHB Invest 2017-09-04: Undervalued Sole Listed Indonesian Water Proxy

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MOYA HOLDINGS ASIA LIMITED 5WE.SI

Moya Holdings Asia - Undervalued Sole Listed Indonesian Water Proxy

• Moya is the only listed proxy to Indonesia’s water treatment sector, and has become the largest water treatment player in terms of capacity after its acquisition of Acuatico. 
• With its SGD60m cash hoard, we believe it could continue with its acquisition spree to further consolidate Indonesia’s private water treatment sector. 
• With rapid forecasted growth and further cost savings initiatives, we believe Moya is substantially undervalued at current levels. 
• Initiate coverage with BUY and DCF-derived TP of SGD0.17 (44% upside), implying FY18F P/E of 13.8x.

Investment Merits 

Undervalued sole listed Indonesian water proxy with explosive FY16-18F NPAT CAGR of 243%. 

• With profits from the Acuatico acquisition, coupled with Moya’s existing organic capacity expansion, we think the company would likely enjoy a substantial boom in its NPAT, with projected FY16-18F NPAT CAGR of 243%. This is exclusive of any potential M&A deals in the pipeline, which would further boost its NPAT if executed. 
• In addition, it is the only listed player exposed to the water sector in Indonesia, and would likely be the biggest player in Indonesia by the end of 2017.

Non-revenue water (NRW) – a key growth driver. 

• With only 53% of Acuatico’s water reaching the masses, the remaining 47% of leakages, which are also classified as NRW, can potentially boost NPAT substantially if more of this NRW can be recovered and sold. This can be done through refurbishing or replacing rusty leaking pipes as well as by performing district metering analysis to discover areas where the leaks are located.
• We expect the local Government to focus on reducing NRW as one of the key considerations for any extension in concessions, which is beneficial for Moya as a reduction in NRW would further boost its topline and margins given that the majority of gross profit from incremental sales of NRW would likely flow down to PBT directly. 
• Management would likely begin works on a plan to gradually reduce NRW by 50% by 2023.

Much higher IRRs of 15% as compared to China’s municipal water treatment projects (IRRs of 8-10%). 

• The IRR for Moya’s projects for municipal water treatment projects are about 15%, much higher when compared to similar projects in China, where IRRs range between 8-10%. In addition, tough competition in China continues to put downward pressures on IRRs going forward whereas for Moya, it is currently the first and main mover. 
• There is still a huge proportion of Indonesia’s population with no access to clean water, hence with pro-clean water government policies, the IRR for these projects should remain attractive for the next 1-2 years, in our view.

More M&As can be expected very soon. 

• Moya’s management believes in growing inorganically as well, and is open to acquisitions to increase its production capacity as rapidly as it can. Given its track record especially after the acquisition of Acuatico, we believe that it is likely to continue to target acquisitions.
• Its latest acquisition was 100% financed via a bank loan. With more than SGD60m of cash still on its balance sheet, we think that there would likely be more potential acquisitions in the pipeline over the near term, which would further boost its explosive growth going forward. 
• Management had previously revealed that it would be aggressive on the M&A front as Moya aims to be the first mover and the main water player in Indonesia.

Strong organic growth and increase in capacity. 

• Going forward, we expect strong organic growth at Moya itself, with phase 2 expansion for Berkasi completed in Mar 2017, ramping to full off-take by 2018. Back in 2016, Moya was selling about 500 lps. The company is currently selling about 1,300 lps and that should likely reach 2000 lps by 2018 after the piping is completed.
• That would result in revenues and profits at least doubling by end-2018. In addition, management is looking to expand into other parts of Indonesia, although its focus would be on Jakarta first.

Pro-clean water policies set by the local Government. 

• The Government of Indonesia has pledged to reach the universal coverage target of 100% access to safe water and sanitation by 2019, and it conforms with Law No. 17 year 2007 and Rio+20 commitment as it is mandated in the National Medium Term Development Plan 2014-2019. Current safe drinking water access has only reached 67%, and improved sanitation access is at 59.71%.
• The Government’s policies and goals are in line with that of Moya’s and with both heading in the same direction. It would also be positive for Moya to continue to expand organically to help the Government fulfil its plans. 
• We expect the renewal of existing concessions as well as the award of concessions for new areas to be granted with less roadblocks if Moya is willing to comply with the terms laid by the local Government. This would benefit Moya, especially now when it is growing its capacity aggressively.

Cost savings and synergies from mergers to further boost bottomline and net margins. 

• We understand that there would be cost savings such as management and human resources cost savings, as well as other synergies from the latest Acuatico acquisition and future acquisitions. We expect USD5-7m of cost savings from the recent acquisition, which would boost its bottomline in 2018.
• Going forward, with plans for more M&As in the pipeline, we expect more cost savings and synergies to contribute positively to the group’s NPAT.

Management to focus more on investor relations activities. 

• Previously, the management of Moya had focused on expanding production capacity, as well as growing the company’s bottomline, without meeting many investors or analysts. 
• We understand that all this would change going forward, with management setting out a portion of their time for investor relations activities, as well as hiring an investor relations firm to help them on this front. We believe this would help realise the stock’s true value and bring its share price closer to our TP.

Valuation

Initiating coverage with BUY call and TP of SGD0.17 

• DCF-derived TP of SGD0.17 with a 7.7% WACC. 
• We initiate coverage on Moya with a DCF-derived TP of SGD0.17 and a BUY recommendation. 
• Our assumptions are: 
  1. Risk-free rate of 2.75% from the 10-year average yield of the 10-year Singapore Government bonds;
  2. Expected market return of 10%, based on Bloomberg’s 10-year average return for the Singapore market; 
  3. Beta of 0.9;
  4. Terminal growth rate of 1% 

Peer Comparison 

The only listed proxy to Indonesia’s water sector with significant growth potential, trading at undemanding valuations. 

• Going forward, contribution from its latest acquisition – Acuatico – as well as organic growth at its new plant in Berkasi, and the increase in sale of NRW, are expected to boost earnings and margins. 
• In addition, we believe that management would likely continue to go on an acquisition spree to further consolidate Indonesia’s private water treatment sector. With such rapid growth going forward and further cost savings initiatives, we expect Moya to chalk a 3-year (FY16-18F) NPAT CAGR of 243%.
• Lastly, with a current market capitalisation of only USD223m, the stock is effectively trading at only 9x FY18F P/E, with a much better IRR return vs its peers. Moya is also trading at deep discounts of 41% and 60% when compared to its local and foreign peers respectively. 
• Our DCF-derived TP of SGD0.17 suggests FY18F P/E of 13.8x, lower than that of the local listed peers.

Key Risks 

Execution risks. 

• Water contamination may result in negative performance and build- operate-transfer (BOT) contracts being terminated and long legal litigations if the facilities are poorly maintained. 
• In 2015, the Jakarta Court ruled against Suez Environment for failing to provide sufficient clean water and had annulled its contracts, with Suez Environment intending to appeal.

Political changes may affect future concession renewals. 

• Political changes in Indonesia, especially the change in the governing party, can affect concession renewals for existing projects, as well as the award of new projects going forward. 
• In addition, the political agenda of the party in power would also be important for the continuation of the Government’s plan to provide clean water for 100% of its population.

Foreign exchange risk. 

• Operating solely in Indonesia while reporting in SGD terms exposes Moya to the risk of the IDR underperforming as well as the fluctuations of the IDR, which can be quite volatile at times. However, it does have a natural hedge as costs are mainly denominated in IDR.

Increase in competition may affect IRRs and margins. 

• With the high IRRs in Indonesia as compared to China’s for municipal water treatment projects, we think that there may be more competitors going forward, which would eventually cause a downward pressure in IRRs as well as margins. 
• However, the barriers to entry is high as the competitor would need a sizeable amount of financial clout, as well as political connections for concession renewals as well as the winning of new BOT projects.

Company Background 

Moya is a Singapore-based investment holding company that engages in the development of total water solutions. 

• Under the company’s BOT business segment, Moya provides water treatment solutions which include commissioning, operations and the maintenance of water treatment plants. Currently, the company has three ongoing contracts in Indonesia.

25-year BOT contracts. 

• The main source of revenue comes from BOT contracts that Moya, through its subsidiaries, has secured. The duration of each BOT project is 25 years, starting after the first sale of drinking water.
• The contracts can be terminated before the end of term or extended if necessary. These contracts are usually an arrangement between the Government and the private sector, where the private contractor builds, operates and eventually transfers ownership to the Government.

Key milestones 

• 2011 - Moya Indonesia was established to oversee operations in Bekasi Jaya, Tangerang 
• 2012 - Secured the 25-year BOT Tangerang Project 
• 2013 - Relisted on SGX-Catalist as Moya Holdings Asia Limited 
• 2015 - Successfully sold its Cambodian subsidiaries after completing its engineering, procurement and construction (EPC) projects 
• 2016 - PT Moya Indonesia and Maynilad Water Services Inc agreed to establish a joint venture to provide water and wastewater services in Indonesia 
• 2017 - Entered into a Memorandum of Understanding with the Government of Bekasi City with regards to the development of a water supply system in Bekasi City.

Company structure. 

• Moya comprises:
  1. PT Moya Bekasi Jaya (95% owned)
  2. PT Moya Tangerang (95% owned) 
  3. PT Moya Makassar (95% owned)
  4. Acuatico Group PT 
• Moya Bekasi Jaya (MBJ). Currently in its sixth year of commercial operation, the Bekasi project is a 25-year BOT contract with the local water authority PDAM. The plant currently serves two districts – North and South Cikarang – with approximately 2.8m customers, out of which only 27% are served with clean water.
• Recently, MBJ completed the construction of a new water treatment plant capable of treating 500 lps in Feb 2017. MBJ had also completed the construction of a new 2 x 2,000cu m reservoir in Villa Mutiara Cikarang.
• PT Moya Tangerang (MT). Currently in the third year of commercial operations, MT is another 25-year BOT project with PDAM. This project is an amalgamation of an existing plant and a new capacity constructed by Moya. The location of this project is right beside the Cisadane River, where a 10-gate dam, which was constructed by the colonial Dutch, provides the water supply.
• In Mar 2016, MT signed a second amendment to the cooperation agreement with PDAM Tirta Benteng Kota Tangerang, whereby it would focus on water supply in zone 1. The capacity at MT increased by 200 lps through an uprating process, which was completed in 2017.
• PT Moya Makassar. Poised to commence construction of its water treatment plant in 2018.
• Acuatico group. Acuatico Pte Ltd is a holding company incorporated in Singapore. The group was established for the main purpose of developing and managing the water infrastructure development projects in Southeast Asia. It currently holds investment projects in Indonesia. The group has three subsidiaries: 
  1. PT Aetra Air Jakarta;
  2. PT Aetra Air Tangerang (AAT); 
  3. PT Acuatico Air Indonesia (AAI).

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-09-04

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