PPWSA's 1H18 review: Operating profit margin narrows as expenses on salaries & electricity surge

Water subscription sees strong increase in 2Q18

• Total water subscription reached 355,090 at the end of June, up almost 5% from the end of 1Q18. The increase of 16,798 subscribers during 2Q18 is the biggest quarterly growth since at least 2015, and could be mainly the result of the company’s continued expansion of service coverage area and an increase in demand for water connections from completed houses of major housing development projects in the capital. In fact, subscription by household clients saw the highest growth, rising by 15,716 or 5.7% QoQ, compared to only 1,030 or 1.8% QoQ for the commercial and industrial clients.

• During the first six months of the year, the total number of subscribers rose by 21,802, of which 19,790 are household clients (up 7.3% compared to the end of last year), 1,765 commercial & industrial clients (+3.2%), 233 houses for rent to garment workers (+4.3%), and 14 other clients (government institutions, water distributors, and autonomous state authorities).

Top line rises 5.7% YoY in 2Q18; 1.3% YoY in 1H18

• In 2Q18, total revenue rose 5.7% YoY to KHR61.4bn. The moderate revenue growth in the second quarter was mainly driven by surges in income from construction services and other incomes. Income from construction services from April to June jumped 133.9% YoY to 3.6bn thanks to PPWSA’s involvement in water-pipeline construction projects in Kampot and Siem Reap provinces. Meanwhile, other incomes—which include service fees from water subscription, replacement of water meter and other spare parts, and others—surged 43.8% YoY to KHR6.9bn as a result of the strong increase in water subscriptions. However, 2Q18 was marked by a decline in core water sales for the first time in more than four years, with the revenue from water sales decreasing 1.7% YoY to KHR51bn. Despite an increase in water consumption, water sales declined due to a drop in average water tariffs from KHR1,068 to KHR884 per cubic meter for households, and from KHR1,030 to KHR700 per cubic meter for houses for rent to garment workers.

• Total revenue in 1H18 came to KHR115.8bn, up modestly by 1.3% YoY. Income from construction services decreased by 14.9% compared to 1H17 when there were bigger construction projects. Meanwhile, water sales growth was modest, at only 1.4% YoY for the same reason mentioned above.

Operating profit margin narrows as expenses on salaries and electricity surge

• In the first half of 2018, EBITDA came to KHR54.2bn, down 3.2% YoY, while EBIT decreased 5.9% YoY to KHR35.2bn. EBITDA and EBIT margin narrowed 2.2%pt and 2.3%pt to 46.8% and 30.4%, respectively. Although total revenue during the period grew modestly by 1.3% YoY, total operating expense increased moderately by 4.76% YoY. The breakdown of total operating expense shows that expense on salaries and wages surged 24.1% YoY, while expense on electricity and raw materials for water treatment soared 11.4% and 10.1% YoY, respectively. The surges in such expenses could be attributed to PPWSA’s further expansion of coverage area and the increase in water production to meet rising consumption.

Net income in 1H18 jumps 88.8% YoY 

• With net interest expense reduced substantially from KHR18.7bn in 1H17 to slightly over 0.86bn in 1H18, net profit for the first six months of 2018 jumped 88.8% YoY to almost KHR27.5bn. The substantial amount of interest expense in the first six months of last year was mainly due to unrealized forex loss from borrowings in foreign currency.