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September 28, 2015 at 08:00 PM
Neil Kalton, CFA
Wells Fargo Securities
314-875-2051
[email protected]
Following American States Water’s (AWR) Q2 report, we are tweaking our 2015 estimated and 2016 estimated earnings per share (EPS) to/from $1.47/$1.45 and $1.53/$1.52, respectively, solely due to modified share repurchase timing.
We still forecast roughly $80 million in total repurchases over the 2015-2019 period. We continue to believe a four-year EPS compounded adjusted growth rate (CAGR) of 5% off our 2015 estimate of $1.47 is achievable.
AWR’s attractive fundamentals include a 5-year rate base CAGR of 5-6% supported by $90 million of annual capital expenditure, a 5%-plus dividend/share CAGR and a solid cash flow profile that includes the recent initiation of a second share buyback program (up to 1.2 million shares through June 2017, after completing the 1.25 million share program in May 2015).
California update: All of Golden State Water Company’s (GSWC) service areas are meeting the mandated water usage reductions. Sales were 13% lower in Q2’15 versus Q2’14, and the trend is expected to continue in 2H’15.
However, GSWC’s earnings have not been impacted, as California’s water revenue adjustment mechanism (WRAM, which decouples sales from revenues) provides financial protection.
We believe more buybacks and/or a dividend-payout ratio increase may be pursued over the next five years, if an attractive investment and/or merger and acquisition opportunity does not arise, as AWR looks to maintain a consolidated equity ratio near GSWC’s authorized 55% level. Our 5% dividend CAGR results in a reasonable 62% payout ratio on consolidated EPS in 2019.
American States Utility Services’ awards: While the request for proposal, or RFP, process is long (three-plus years), and the rate at which new bases have been awarded has been sporadic at best lately, we did gather a sense of optimism from AWR management recently that the military may announce a few RFP winners before year-end. In addition, the government typically announces construction project budgets at the end of Q3 — last time around ASUS was awarded $27 million worth. Stay tuned.
Our $35-$36/share valuation range is based on a P/E multiple (apply an approximate 19 times multiple to our ‘17 estimate of $1.58) and dividend-discount model analyses. Regulatory and ASUS construction levels are key risks.
We regard AWR as a low-risk water utility with a growing dividend. We consider California regulation to be constructive. We believe ASUS could contribute 15-20% to consolidated EPS, with upside potential if new military contracts are awarded. Our rating reflects valuation considerations.
Tim Winter, CFA
Gabelli & Company
314-238-1314
[email protected]
American States Water of San Dimas, California, is the parent company for Golden States Water Company (GSWC) and American States Utilities Services (ASUS). GSWC is a regulated water utility serving 256,000 customers throughout Northern, Coastal and Southern California, as well as providing electric distribution to 23,000 customers in Big Bear, California.
ASUS provides non-regulated water/wastewater and construction services to nine military bases across the nation. AWR is a high-quality utility with a strong balance sheet (59% common equity) and high credit ratings (S&P A+).
On Aug. 4, AWR reported second quarter 2015 earnings of $0.41 per share compared with $0.39 per share for the same period last year. Results by segment are outlined below.
GSWC earned $0.33 per share compared with $0.33 per share last year. The positive impact of rate increases, lower interest expense and a lower effective income tax rate was offset by higher administrative and general expenses related to higher legal and other service costs [tied] to condemnation and drought activities.
We continue to be impressed with the ASUS’ success and profitability and believe its experience and expertise result in the “non-regulated” business carrying the same risk-profile as the regulated water utility business, but with significant growth potential.
Spencer E. Joyce, CFA
Hilliard Lyons
502-588.8402
[email protected]
Aqua America (WTR) reported Q2’15 EPS of $0.32 versus $0.31 in Q2’14. Results met consensus and missed our target by a penny. In our estimation, core operations drove most of the year-over-year upside.
