Sunday 9 March 2014

Analysis of Tallinna Vesi

An Estonian water and wastewater company

Company: Tallinna Vesi AS

Business: An Estonian water company. They are dealing with three things: Water Supply (mainly to the capital Tallinn), Collection of Wastewater (making sure that the pipes goes to their centrals) and finally Wastewater Treatment (cleaning all of it before sending it out to the Baltic). They have managed to receive all the quality stamps that EU hands out and they own the rights to provide and treat the water from Tallinn until 2020 (meaning simply that they have monopoly for another 6 years) . This means that they are servicing over 30% of the entire population in Estonia.

Active: Estonia and more specifically in Tallinn and suburbs to Tallinn.

P/E: 11.2

contrarian values of P/E, P/B, ROE as well as dividend

The P/E for Tallinna Vesi is fully acceptable with 11.2 but the P/B is a little too high for my liking with 3.0 and this then also gives us a no go from the formula of Graham. The earnings to sales are excellent with 43% and the ROE I find surprisingly high, which is excellent, at almost 27%. The book to debt ratio is ok with 0.7 even though I prefer a higher value. In the last five years they have had a yearly growth of 4.3% which is also great for this type of company. Just look at Veolia or Severn Trent for comparison. This then gives us a motivated P/E of 15 to 17 which means that Tallinna Vesi is today undervalued by the market. They pay an excellent dividend of 6.6% which corresponds to 74% of their earnings so a little bit too high %-age of the earnings which also could explains a bit how they look upon their future at the moment.

Conclusion: Graham is very clear no on this company and I am slightly more positive to it. The Baltic countries are doing pretty well and this type of monopoly situation is usually nice to have. On the other hand I wonder what happens in 2020 and I doubt a new provider will step into the market and build up a new waster supply and water treatment system. Still for Tallinna Vesi they have a great P/E, excellent ROE, fully ok growth and dividend payment so many key values are well in place. Still...

I decide not to add it to my Stocks of Interest list but maybe that is wrong of me?

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