How to leverage Water Authority’s assets
The Cayman Islanders are already some $600 million in debt and $780 million when the $180 million cost of still unfunded pensions are added.
Now that the UK is enforcing the current limit on debt and the government is faced with a shortage of funds to pay its employees’ salaries and pensions, it really has little choice but to divest non-strategic assets, so as to prevent a potential credit rating down-grade that would raise its future cost of borrowing.
While government control should probably be retained over key profitable assets, such as the Port Authority, Civil Aviation and even the unprofitable ones, such as Cayman Airways, there are still some valuable assets, such as the Stock Exchange and the Water Authority that could easily be leveragedto raise substantial capital.
The assets of the Water Authority (WA) are the most valuable and the easiest to leverage to obtain best value, thanks to the ideal benchmark comparison provided by the Consolidated Water Company (CWCO). The CI government is not involved in any other utility companies, so why is it in the business of making and selling water?
Fresh water is increasingly becoming a precious commodity and companies dealing in water have seen strong investment demand, particularly those operating in a tax free environment, such as CWCO, which currently commands a high Price/Earning ratio (PE) of 32.19 with the stock trading at about $18.00 and a market capitalization of $260.1 million.
In brief and rounded figures, CWCO has $122.2 million in total assets ($116.5 million Net Tangible Assets), $8.08 million in income and a PE of 32.19, these figures being excerpted from a key data screenshot http://tiny.cc/5GTUz made on August 3rd. The Water Authority, on the other hand had $46.3 million in assets and $3.7 million in surplus/net income, as reported on pages 306 and 309 of the 2008-2009 Budget.
If the Water Authority’s assets were bundled up into a public company trading on the Nasdaq through an Initial Public Offering (IPO) – the same route employed by CWCO to become public – and using the same parameters that currently apply to CWCO, we would get the following valuation:
-Based on assets:
CWCO: $260.1 mil/$122.2 mil = 2.13
=> WA: $46.3 mil x 2.13 = $98.6 mil
-Based on net earnings:
CWCO: $260.1 mil/$8.08 mil = 32.19 PE
=> WA: $3.7 mil x 32.19 PE = $119.1 mil
So, if these Water Authority Assets were trading on Nasdaq now, they would likely be worth between $98.6 and $119.1 million, or an average of approximately $109 million of Market Capitalization. However, CWCO stock has been trading much higher during the stock market bubble – in fact twice as high, but there is no certainty that this will happen again soon…
CWCO: a resounding success
Admittedly, CWCO is well managed, has expertise producing fresh water efficiently and has been aggressively marketing its services outside the Cayman Islands, where growth is naturally limited. CWCO share price has risen from $5.00 in 2002 to over $36.00 in 2007 and now stands at $18.00 – not counting a 2 for 1 stock split that occurred in July 2005. This means that a shareholder spending $5000 to buy 1000 shares in 2002 would have had 2000 x $36.00 = $72,000.00 at the peak in 2007 and still a respectable $36,000.00 nest egg at today’s date – a 720% increase in 7 years!…
No wonder the stock of CWCO is in such demand and fetches such a high PE.
This is why it would make good financial sense for the CI government to IPO say 48% of the stock to retain control of the new public water company as the majority shareholder, thereby raising about $52.3 million cash – less about 10% in underwriting expenses. By keeping 52% of the stock worth some $56.7 million, the government will take advantage of future price increases, which could be substantial, judging by CWCO stock history.
So, the IPO of 48% of WA’s assets would bring in cash more than their $46.3 million book value, while the government would still have nearly $57 million in remaining controlling equity in the new public company: this is clearly a case of having eaten your cake but still having it for an encore…
Of course, if the stock market continues to improve, then even more money can be raised from this operation. However, an IPO will take at least 6 months to set up, so the decisionto proceed should be made without delay. The extra cost of operating a listed public company – audit expenses at CWCO were $326,000.00 for 2008 – is nothing compared to the ability to raise additional funds for expansion through issuing new shares.
The change to a performance driven public company would be excellent for the spirit of the WA employees, as their good work could now be rewarded with stock options, as is the case at CWCO, which may explain why Mr F. McTaggart left WA to join CWCO long ago, where he earned over $500,000.00 in total compensation for 2008 as its CEO. In addition, he has also accumulated some 116,257 shares of stock worth over $2.2 million at $19.00 per share!
CWCO reported 2008 consolidated bulk water sales of 1.05 billion gallons worth some $9 million to WA in the Cayman Islands and $19 million for 3 billion gallons in the Bahamas with a corresponding net income of $3.2 million without breaking it down by location. If the margins were similar in both markets, this implies that CWCO earned around $1 million selling water to WA that it actually makes in WA’s own plants. However, it’s clear from the above figures that CWCO is charging WA some 36.5% more for its bulk water – $0.0086 per gallon instead of $0.0063 in the Bahamas – so CWCO’s profit on bulk sales to WA in the Cayman Islands may well be closer to the $1.5 million mark, depending on the respective plant efficiency, since there is only about 2 cents per kWh (~10%) difference for large commercial consumers…
Driven by a new entrepreneurial spirit, the new company should endeavour over time, based on the existing management contracts with CWCO to operate its own plants, which would add at least 30% to its current bottom line and would have a very beneficial effect on its stock price. In addition, the new public water company would be free to contract outside the island for additional business, as CWCO has done so successfully.
Changing focus and regulations
Under beefed up management, the new public company should become more customer friendly: huge bills that outrage customers so much that they file lawsuits and a CI$21.00 minimum cost to read a meter, compared to $5.00 for the same job done by CUC, should become things of the past, as consumers yearn to be treated in a fair and equitable manner.
Then, a special government Authority that supervise all the utility companies should be created along the lines of the ICTA, where the utility companies would fund its operation in order to set rules and investigate complaints, as customers well know that it’s impossible to expect a fair shake when the potentially guilty party is also the judge and jury…
While CWCO does not break down the value of its assets by country of operation, it appears that the total depreciated value of its plants and distribution system in the Cayman Islands can be estimated at about $30 million…
Interestingly, some 30% of assets at CWCO are now in cash to the tune of $41 million, including about $13 million worth of secured bonds on which CWCO pays 5.95% interests – even though it now has the right to repay the entire amount from cash on hand with only a small penalty. One cannot help but comparing this $41 million stash to the $46.3 million assets value of WA and speculating whether CWCO is trying to buy out WA’s assets cheaply.
Will our government be tempted to grab some much needed cash quickly and liquidate WA’s assets for around book value, or will it have the fortitude to implement this proposal to best leverage these assets while raising even more cash in about 6 months and keeping a majority stake worth around $57 million in the new public company??…
Note: Since this analysis was written on 3rd August 2009, CWCO has reported a large increase in profits and its stock price has briefly reached $19.96 before settling back…
Category: Viewpoint
One suggestion, if an IPO is to be considered, go it the old-fashioned way and make sure the deal is fully underwritten at a pre-agreed IPO price and see that there are sensible lock-up provisions.
The onus (and monetary risk) would be on the underwriting bank(s) to determine a realistic, market-clearing, selling price. Government would know pre-offering, the dollar sum it would receive. Any shares remaining unsold (and thus held by the underwriters) post-offering could not be summarily ‘dumped’, depressing the share price and potentially damaging/dampening investor interest, not to mention downsizing Government’s carrying value.
Beware of underwriters promising high valuations, but not willing to put their money where their mouth is. Also, make sure everyone’s eating their own cooking.
A fully-underwritten deal may cost more, but better to avoid the potentially even higher price of being penny-wise and pound-foolish. Any additional fees should be weighed-up against the risk of Government receiving the lower-end of valuations debated in these comments, namely receiving 48% of $50 mil instead of 48% of a ‘hoped for’ $110 mil – that’s a big difference.
IPOs take time and money and tie up key resources. IF Government is to go this route, I’d suggest getting the price and the commitment to a fully-underwritten deal upfront: best no unwanted surprises or failure fees.
IPO suggestion…
You obviously know what you’re talking about…
Usually a price range is agreed between the parties and the final price is determined in the last couple days leading to the IPO, depending on market conditions and response from investors…
$52 million is a small IPO that can easily be fully underwritten on-island. It would actually be better if it were done by a consortium of the main banks, rather than just one, so as to allow a larger number of local investors to participate…
The stock also has to be listed on Nasdaq and there should be around 15 million shares outstanding to provide enough liquidity – a mistake CWCO made by having fewer shares issued originally – that should start trading around $7.25 ==> 15 million x $7.25 = $108.7 million…
I have already sent the study to a major bank and they’re interested to participate: let see if the government finally gives the go ahead soon, as it will take around 6 months to organize…
The Chamber of Commerce has recently come out in favour of assets disposition, including doing IPO’s…
It’s a Win-Win situation for all concerned:
– Assets valuation by the market would more than double to about $109 million – from $46.3 million currently in government’s books – based on the parameters of the other water company in Cayman, CWCO…
– Government would raise some $52.3 million cash by selling only 48% of the company in the IPO, while retaining a controlling 52% equity worth around $56.7 million…
– By manning its own plants now operated on a subcontract basis by CWCO, the new public company could add another 30%+ to its bottom line, thus increasing the share price proportionally…
– A major local bank is already interested in doing the IPO to keep the process on-island as much as possible and local investors would have priority in acquiring the newly issued stock…
This could be a model to leverage other valuable assets gathering dust in the government books…
IS THAT THE REASON, why is the water company is trying to fleece money under false pretense from people who do not owe them?
Responding to 3 posts…
1) Will the cost of water incease?
As the regulatory body, the Water Authority controls the base rate for water sales, which can fluctuate depending on the cost of electricity and is shown on your water bill under ‘Energy Charge’. If this proposal sees the light of day, a regulatory body would be created, separate from the new public water company, to which both water producers in Cayman would need to apply for any base rate revision…
The Water Authority currently pays about 0.86 cents per gallon to CWCO and charges out a base rate of 1.8 cents, plus .003 for ‘Energy Charge’, for a total of 2.1 cents per gallon…
2) Why not use CUC as a comparable instead of CWCO?
If there had not been a perfect comparison, such as that with CWCO, I would not have bothered doing this study. Water utilities are far more popular with the investment community than electricity producers and here is the comparison between CUC and CWCO:
1000 shares of CWCO bought in 2002 @ $5.00 cost $5000.00
417 shares of CUC bought in 2002 @ $12.00 cost $5004.00
3 Aug 2009: 1000 x 2 (2 for 1 issue) @$18.00 = $36,000.00 => Gain 720%
3 Aug 2009: 417 x @$8.70 = $3,628.00 => Loss 38%
So, let’s compare oranges with oranges and CWCO provides the perfect benchmark for estimating the market value of the Water Authority’s assets if they traded on Nasdaq…
3) The government shouldn’t listen to people…
Had you read the clarification I have provided above, you would know that they were no security fraud involved: the only thing I did wrong was a failure to report a stock position as a group exceeding 10% and as an individual, exceeding 5%, which is a technical issue…
The current supply of water is already a monopoly, since you have no choice of supplier…
The government asked from the public to make suggestions to improve its financial situation and I did in good faith. I also recommended that the $US100 million in reserves be diversified into 1/3 Gold, 1/3 basket of strong currencies and the rest in US Dollars, which will become very weak in the near future…
But, apparently, the government prefers to pay hundreds of thoudands of Dollars to consultants when they can have such sudies for free from concerned citizens, whether they are used or not. If close to $100 million had not been squandered on building and operating the Turtle farm at a loss of some $8 million a year, this country would not be in the mess it is now…
3) The government shouldn’t listen to people…
Why would the SEC be asking, and the court in Ohio agrees and has granted their request, that you disgorge $216,861.00 plus $81,251.00 in prejudgment interest?
Instead of arguing the case, why don’t you ask CNS to post a copy of your sworn depostion taken at the Marriott Hotel in 2004 and let the readers have a look at your own words and decide for themselves?
The answer is simple…
When you fail to report a position exceeding 10% as a group and/or 5% as an individual, the penalty is automatically to pay back profits made on such position and interests…
The balance of the allegations that remain unproven will be withdrawn upon settlement and if you were prudent in the way your write you would use the words ‘alleged’ or ‘allegedly’, just like you read in the newspapers and for good reasons…
I know it’s the custom to attack the messenger when one doesn’t like the message or has a different agenda, so why don’t you now focus on the content of the message, which is the purpose of this thread, as I won’t entertain any further personal comments…
The real issues at hand that should be addressed are:
– What is wrong with leveraging the assets of the Water Authority from $46.3 to $109 million and obtaining ~$52.3 million cash minus 10% expense, while keeping a ~$56.7 million controlling equity in the new public trading company?…
– In addition, what is wrong with my suggestion that the Water Authority saves itsef between $1 and $1.5 million by operating its own plants instead of having CWCO do it for them?
I think the government spend all that money on consultants so they got someone they can blame (as they always do) when the proverbial shit hits the fan (as it always does).
Great idea.
Government should divest itself of all profitable assets and keep only those assets that cost Government a lot of money.
What a brilliant idea.
I certainly hope that the LOGB is not swallowing this kind of advice from those advisors who seem to be trying to gobble up anything they can from an already dire situation.
If the water authority is profitable, it and any other Government asset that is profitable should be placed in a list separate and apart from the unprofitable assets and marked non-negotiable.
It seems that whenever their is a crisis their is always someone looking to profit from it.
As Minister of Financial Services Mr. Bush it is incumbent on you to protect public assets that derive benefits for the public.
If you read the study at all, then you have not understood it, so let me try to make it clearer:
– Current value of Water Authority’s assets in Budget: $46.3 million
– Cash raised on selling 48% minority interest in IPO: ~$47.1 million after deducting 10% for IPO underwriter’s expenses.
Value of 52% government controlling interest remaining: ~$56.7 million
So, in this real life study, the value of WA assets have more than doubled, from $46.3 million to a total of ~$109 million by having the stock market putting its valuation – based on that assigned to CWCO – on the assets…
If this is not a Win-Win deal, I don’t know what is and I really have no vested interests in its outcome, should it ever happen…
Now, what investor do you think would be silly enough to buy something like the Turtle Farm that lose about $8 million a year and cost around $60 million to build for more than a quarter on the dollar?…
Valid point re: the need to prioritize addressing Turtle farm losses. The Payout Ratio comparison above was an attempt to draw attention to the need for greater scrutiny of capital allocation and return on investment across all sectors.
32x earnings and 2x net assets seems a steep price for a utility: CUC ($8.19/shr) currently trading around 15x earnings and 1.4x net assets; CWCO’s higher multiples possibly attributable to stronger growth.
Earnings for the WA, based on figures in past Budgets and Ownership Agreements, appear to have ranged from around $2-$4 mil a year, with average closer to the $2.0 mil level. WA’s Net Worth at June 2009 recorded at $46.3 mil. Combined, these suggest a return on equity in the region of 5%-10%.
Implied WA valuation at 10x-15x earnings: $20 – $60 mil (avg: $40 mil).
Implied WA valuation at 1.0x-1.5x net assets: $45 – $70 mil (avg: $57 mil)
Split the difference: $48.5 mil
Ownership agreements suggest the WA has been distributing dividends of approximately $100k a year back to Government from earnings of $2-$4 mil. If so, this represents a Payout Ratio of 2.5%-5%. By comparison, CUC’s Payout Ratio to shareholders has tended to be in the region of 75% -80%. Barring significant capital investment opportunities for the WA, Government might consider seeking a higher Payout Ratio: possibly a $1-$1.5 mil annual dividend?
The hole in your argument is the last sentence – Water Authority invests a vast proportion of it’s profits back into infrastructure and improvements (eg. the North Side Plant). These projects do not come cheap I would guess. But I will say your calculationswork IF you don’t take account of investment in capital projects.
LOGB also hinted recently at expanding the sewage collection system. Where does the money come from for that if not from Water Authority profits?
In my humble opinion Goverment should be holding on to money making arms of it’s empire instead of gambling on their propserity. Better off closing the Turtle farm – that will save a bundle of Government cash…..
Closing the Turtle Farm would be a very bad idea.
Where would the turtle meat (so essential for getting votes at election time) come from.
No Politician will ever close a vote getting entity. It is simply an essential part of their political survival.
Won’t any privatisation of the Water Authority result in an increase in rates to pay the shareholders dividends? If that is the case, why not just raise the water rates and let Government take 100% of the extra money generated?
Only in the Cayman Islands is it possible…..
…..for someone charged (and partially convicted already) with securities fraud to stand up and thank the LOGB for giving him status (after being charged with securities fraud) and then going on to offer advice on how one of the Government’s assets could be turned into a public traded company.
http://www.sec.gov/litigation/complaints/comp18088.htm
An old stalking nemesis from the days of posting on financial forums just showed up today…
Anyway, thanks for bringing up this subject, so that it can be put in its correct perspective…
There is indeed a civil – not criminal lawsuit – by the SEC against myself, which is about to be settled and where it will be shown that the main charge that will remain is not reporting in a filing a position exceeding 10% as a group and 5% as an individual – a technicality…
I bought stock in a shell in good faith prior to its merger with a private company. About a year after the stock began trading, it was discovered that the shell had been improperly formed and should never have been allowed to trade.
I was so bullish on the prospects of this company, that I bought an additional 44,000 shares on the first day of trading and sold less than that amount over the following 9 months, the period under consideration by the SEC.
So, the other charge of trading unregistered stock should have been dismissed, had I picked an honest attorney to represent my interests. Unfortunately, my attorney Mr. Philip Offill – a bright ex-SEC attorney – has been charged in a fraud case and is facing a long jail sentence and millions in fines. He didn’t even file a brief in my defense…
All the other charges that were thrown in for good measure will be withdrawn as part of the settlement, which I shouldn’t discuss further until the matter comes to a close.
At any rate, this is a thread on about how to best leverage the Water Authority’s assets, so let’s not have personal issues detract from the substance of the subject at hand…
I am just curious, but how do justify not reporting a position that large as being a technicality. you’re financially astute and anyone with a brain knows when evaluating equtiy those shareholders and their own objectives must be evaluated. Hardly a technicality I would say.
Furthermore, yes, it is a forum for the improvement of government but your attempts to defend yourself are falling on deaf ears and are a hinderance to the above analysis.
Interesting idea, but has anyone really compared the water quality between the CWCO and WA?
I understand that ICE Machines along the 7 Smile strip have to be regularly overhauled/replaced and faucets due to the hard water in the area, which is supplied by which company I am not sure?
CWCO makes all the water sold on the island: its own for its distribution system and all of the Water Authority’s water in the 3 WA plants.
So, the quality of the product should be fairly constant throughout…
If the Water Authority manned its own plants, instead of subcontracting its water production to CWCO, it would add between $1 and $1.5 million to its bottom line, which is a move I strongly believe should be made as soon as the existing contracts run out.
That’s what happens when a company is run by the government: there is no incentive to become efficient and make a larger profit!…
That’s why apparently the Water Authority pays some 35% more than the Bahamas for its water, even though there is only about 10% difference in the cost of electricity.
As a newly recognized expert in the water field…
…it is surprising to see that you are not aware that water is "treated" after production and before distribution. Two of the main items added added are rust inhibitors, and chlorine. In the US, flouride is another common additive to keep kids teeth from rotting. The amount and type of additives would account for the difference in water distributed on the island even if it all came from the same source or was produced using the same process.
I see that the lawyer representing one of the defendants during his depostion at the Marriot in 2004 is now facing 185 years in jail.
http://www.dallasnews.com/sharedcontent/dws/bus/stories/031409dnbusoffill.30521dfc.html
That’s the kind of lawyer that a person would want to distance themself from in a hurry.
I would imagine that the chemical additives injected into the water produced by CWCO for itself and the Water Authority would be to a uniform standard satisfying the rules and regulations set by the Water Authority itself, as a regulatory body.
In addition, both CWCO and WA have labs that regularly analyse the water quality.
Nobody in his right mind buys a defective product or stock, or hires the services of a crooked attorney knowingly: the problematic issues come through afterwards and one has to live with one’s bad decisions and learn to be more careful in future…
I have no vested interest in CWCO or anything else regarding this study on how to best leverage the Water Authority’s assets. However, as someone who has lived here for 22 years and invested everything I own, I have an interest in not paying additional taxes, if it can be helped…
This proposal could also be a template for future leveraging of other profitable government assets, such as the Stock Exchange, Port Authority and Civil Aviation, but the Water Authority was by far the easiest to study and quantify, thanks the the CWCO benchmark.
This looks like a part of the Water Company plan to take over WAter authority and create another utility monopoly in Cayman. Water Authority is a profitable venture and it is producing profit and the government as the shareholder should demand a sizable divident every year. Also, the government should not listen to people invplved in securities frauds and he could keep advising the company.
"This is why it would make good financial sense for the CI government to IPO say 48% of the stock to retain control of the new public water company as the majority shareholder, thereby raising about $52.3 million cash – less about 10% in underwriting expenses. By keeping 52% of the stock worth some $56.7 million, the government will take advantage of future price increases, which could be substantial, judging by CWCO stock history."
As an investor both in Cayman and generally I am grateful for this well-considered idea and I say immediately that I will but shares of an IPO of this company, but NOT if the Cayman Islands Government retains majority ownership and therefore full effective control over the company. They have no business in business (made obvious as of late), and it needs to be in private control.
What’s Mr Dart up to? He probably needs 51% of a water company.
He’s holding out for the bigger catch: all three islands.
Glad you like the idea, Theinvestor…
There are several reasons for the government to retain a controlling interest, even though it may appear counterintuitive at first glance…
When I presented Mr. Bush with the proposal at the recent Ritz Carlton meeting, his answer was that he didn’t like the idea of selling a profitable asset, even though I was talking about selling a minority interest and boosting the value of Water Authority’s assets by 235% from $46.3 million to about $109 million in the government’s books…
He suggested that I put forward a plan to sell the prison or perhaps… the Turtle Farm, which has cost some $60 million to build and another $8 million a year to run in the red, for a total loss so far that must come close to $100 million, including interests on the loans. We all remember that this was Mr. Bush’s pet project at one time and that he would be lucky to find someone willing to pay $25 million for it now…
So, the first obstacle to conquer is getting through to the top brass while treading as lightly as possible ( 😉
Then the underwriter will also question why the government wants to retain a majority shareholding, since investors will see that a negative. However, it’s actually a plus, at least in the medium term and here is a clue from CWCO’s last 10K filing:
“If we are unable to renew our license or if we negotiate a new license on terms that are less favorable to us, we could lose a significant portion of our current revenues…”
CWCO is depending on the government to renew its license by July 2010 and is warning its investors that it may not happen; however, a new public water company majority owned by government would be spared such dilemma and would find itself in a dominant position…
Eventually, as new stock is issued to generate growth and/or for acquisitions, the issue would become moot…