Swedbank reduce Tallinna Vesi recommendation to Neutral

Photo: Panther Media/Scanpix

 

o       Above normal sales volumes and construction revenues lead to growth in EBITDA

o       We increase our dividend expectation to EUR 0.84 per share (EUR 0.72)

o       We increase our target price to EUR 9.8 (EUR 9.4), but reduce our recommendation to Neutral

Water utility Tallinna Vesi released Q4 results on January 25, showing EBITDA growth
to EUR 10.1m and net profit to EUR 8.7m, both record figures for the company. The results were 30% above our expectations on the EBITDA line and 65% above our Target Price: €9.8 expectations on the net profit line.

We identified three main reasons for the outperformance: firstly, Tallinna Vesi provided more services in volume terms than expected. According to the company’s presentation, its sales volumes grew from 10.9m m3 in Q4 2011 to record 11.6m m3 in Q4 2012. Majority of the growth was resulted by sales volumes in areas outside Tallinn City, from 1.6m m3 to 2.2m m3, or 36% y/y. The high growth was explained by unusually high storm water volumes in Q4.

Secondly, we had anticipated a larger decrease in profits from construction works of water pipeline, which had pushed Q4 2011 EBITDA to one of the highest levels in AS TV’s history. However, roughly EUR 1.8m profit was booked for the Q4 2012 as well. Consequently, reported EBITDA was roughly EUR 2.3m above our expectations. According to the company’s announcement from July 2009, the City of Tallinn can pay the remaining sum for the construction of the sewerage until June 2014.

Thirdly, the fair value of the company’s interest rate swap agreements rose by EUR 0.4m in Q4, up from EUR 0.7m decline in Q4 2011. As a result, net profit of the company rose by 13% to an all-time high of EUR 8.7m. While the Q4 results were certainly impressive, we do not regard a large part of the three mentioned reasons for the above expected results to be recurring.

However, we had included in our models a scenario of reduced tariffs from 2013 for Tallinna Vesi. As Tallinna Vesi is currently still operating with 2010 tariffs, we maintain the 2010 tariffs for the company for the entire 2013 financial year in our models. We therefore increase our dividend expectation for the year to EUR 0.84 per share (EUR 0.72). We note that the company is trading at a dividend yield of 8.4%, according to our expectations.

We increase our target price to EUR 9.8 (EUR 9.4), but reduce our recommendation to Neutral (Buy) due to the rally in share price since our last comment.