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Given recent small acquisitions from the York Water Co. and Cen-
sus estimates of an increasing population in York and Adams
County, Pennsylvania, York Water Co. is projected to grow at a
faster rate than both inflation and industry projections from IBIS
World which are both around 2.1%. Base case assumptions of
3.1% growth, given population projections, means that when all
valuation methods are considered, York Water Co. has an upside
of 3.55% when compared to its currently trading market price. A
HOLD Recommendation has been placed on the stock given the
simple fact that it is trading less than 10% away from projected fair
value. Upside potential is minimal to be realized in high volumes.
The York Water Company maintains the longest consecutive divi-
dend history in America with dividends being paid out consecutive-
ly for the last 199 years. On top of this impressive record lies an-
other fact worth considering; York Water Co. has consecutively
increased the dividend for the last 18 years and has a 20 year his-
torical dividend payout ratio of 79.7% of basic EPS. This speaks
volumes to the companies lack of cyclicality as well as the goal of
management which seems to be on par with shareholder interests.
Investment Thesis
Company Overview
Company Snapshot
YORW ARTN
Share Price
$23.33 $36.0
52 Week Range $19.7-
25.99
$20.00 -
26.85
Target Price $24.19 -
Difference % 3.55% -
Market Cap $301M $229.4M
Key Statistics (as of year end 2014)
Beta .80 .18
Operating Margin 48.11% 33.8%
Profit Margin 26.66% 15.21%
ROE (as %) 11.93% 9.20%
TEV/EBITDA 13.25x 10.03x
P/E ttm 24.11x 19.40x
EPS $.89 $1.30
Competitors
Connecticut Water Service (CWTS)
Middle Sex Water Co. (MSEX)
California Water Service Group (CWT)
Aqua America Inc. (WTR)
SJW Corp. (SJWRP)
SOURCE: Yahoo! Finance as of 2/20/15
Why York Water Is A Safe Bet
YORK Water Inc.
Nasdaq: YORW November 2015
HOLD
Target: 24.19 Taylor Herron t618h047@ku.edu
The primary business of the York Water Company is to im-
pound, purify to meet or exceed safe drinking standards and distrib-
ute water. The company also owns and operates two wastewater
collection and treatment systems. York Water operates within its
franchised water territory, which covers 39 municipalities within
York County, Pennsylvania and nine municipalities within Adams
County, Pennsylvania. The company's wastewater operations in-
clude portions of three municipalities in York County. Water service
is supplied through the company's own distribution system. The
bulk of York's Company’s water comes from two branches of the
Codus creek which have a combined 73.0million gallons of daily
flow. On top of this, the company owns two reservoirs and seven
wells which provides 12.0 million and 366,000 gallons respectively
to to supply customers in Carroll Valley Borough, Adams County an
the Cumberland Township. The company is regulated by the Penn-
sylvania Public Utility Commission or PPUC in the areas of billing,
payment procedures, dispute processing, terminations, service ter-
ritory, debt and equity financing and rate setting. The York Water
Company continuously looks for water and wastewater acquisition
and expansion opportunities both within and outside its current ser-
vice territory as well as additional opportunities to enter into bulk
contracts with municipalities and other entities to supply water. 1
1 Adapted from company 10-Q Sept. 2015
Page 2
November 2015 HOLD $24.19 Taylor Herron
Competitive Advantage
Risks
The York Water company has paid a consecutive
dividend for the last 199 years and has also in-
creased the dividend consecutively for the last 18
years. Although York Water is paying a smaller divi-
dend than both Connecticut Water Services (CWTS)
and Artesian Resources Corp (ARTN) neither com-
pany has maintained the dividend growth or divi-
dend history that York Water has. The simple fact is
that every county in America has a water supply dis-
tributor. York Water Co. has maintained consistent
dividend growth and has remained unaffected by
cyclical changes in the markets. York's competitive
advantage is their growth potential and manage-
ment who align perfectly with the interests of share-
holders.
The Company's water business is somewhat de-
pendent on weather conditions, particularly the
amount and timing of rainfall. According to the latest
10-Q, revenues are particularly vulnerable to weath-
er conditions in the summer months. As one would
expect, temperatures are generally at their highest
during the summer, which means more risk for de-
hydration and increased water usage in other areas
such as lawn care and irrigation for sports fields and
golf courses. Although the company states that it
has a more than adequate supply of water for such
times, customers may still be required to cut back
water usage under such drought-like conditions.
As a company, York Water has seen a slight decline
in employees but the county of York Pennsylvania has
seen a favorable increase in households each year,
with a CAGR of 1.45% in the 4 years to 2014. The
county is predominantly middle and lower class, but
York has still seen client increases of around 1%. Giv-
en consensus estimates of ~1% annual increases in
housing units, York Water CO. stands to benefit from
the population increases and will experience improved
revenues per client of almost 2% per year.
This can negatively impact revenues due to the sim-
ple fact that revenues are based solely on gallons per
customer usage. York Water takes these concerns
very seriously and as a result, has started instituting
minimum customer charges which are intended to
cover fixed costs of operations under all likely weather
conditions. Although the company does not require
large amounts of working capital, there are still other
risks associated with the business. Increases in reve-
nues are almost completely dependent on the Water
Company’s ability to obtain rate increases from the
Pennsylvania Public Utility Commission (PPUC) in a
timely manner, in adequate amounts, and to increase
volumes of water sold through increased consumption
and increases in the number of customers served.
York Water Company has agreements with multiple
different municipalities to provide sewer billing ser-
vices. One last risk factor yet to be addressed is the
potential for interest rate increases and the underlying
effect on per capita disposable income. Although wa-
ter is a necessity, it is possible to cut back on water
consumption if an individuals budget becomes con-
strained which could mean slightly decreased reve-
nues should the rate increase catch anyone by sur-
prise.
*Graph Created using Data from Yahoo Finance
Market Share and Census Data
Page 3
November 2015 HOLD $24.19 Taylor Herron
Valuation Analysis
Recommendation
For the purpose of this valuation, 6 different meth-
odologies were used, DCF, Gordon Growth Model,
Modified Multi Stage DDM, TEV/EBITDA, LTM P/E,
and TTM P/E, to determine a hexagonal angulation
of $24.03 when viewed from the Base Case as-
sumptions. The York Water company has paid a
dividend consecutively for the last 199 years and
has consecutively increased the dividend for the last
18 years. It is for this reason that heavier weight
was placed upon the Dividend based methodolo-
gies . The Multi stage DDM uses a growth rate of
18.67%, which is the rate at which the dividend was
increased last year, for the next 10 years of divi-
dends and then assumes the 20 year average his-
torical growth of 4.82% for the terminal value. A
Gordon Growth Model was also used to simulate flat
lined dividend growth of 5.5%, which is based on
historic EPS growth figures from the past 5 years.
The actual average of of the past 5 years is 7.07%
annualize growth but this appeared to inflate the
share price from the Gordon growth model and as a
result, a 27% discount rate was applied to bring the
growth down to 5.5%. This growth figure, when
used in conjunction with York Water Co’s 7.93%
cost of equity yielded an estimated value of $25.99
per share. Dividends were also projected out 4
years to simulate the average projection period.2018
EPS estimates of $1.13 appear to be in line with the
company’s history. Given the company’s status as a
major player in the utility sphere, 8 companies were
used to conduct a relative valuation, yielding an aver-
age TEV/EBITDA multiple of 11.5x and an average
NTM P/E of 20.1x. Continuing down the list, a discount-
ed cash flow was also performed, but due to the com-
panies low cost of capital was not weighted very heavi-
ly. DCF analysis yielded an implied equity value per
share of $23.15, which is a downside of .077%.
Based on the weighted average of the valuation meth-
odologies, a fair value of $24.19 was obtained, yield-
ing a potential upside of 3.55%. Certain risks are evi-
dent such as the company’s ability to obtain rate in-
creases from the Pennsylvania Public Utility Compa-
ny, which could translate to slightly decreased reve-
nues. As a result of this and other risks mentioned
beforehand, a HOLD recommendation has been is-
sued. The company Is not affected by cyclicality like
other companies and as a result trades on average
between $19.70 and $25.99. For upside to be real-
ized, the company would have secure these rate in-
creases and pass on to the shareholders.
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