Buy. Better World Green (BWG TB) From Trash To Cash. Industrial - Environment Control Target Price: THB3.10 Market Cap: USD49.1m Price: THB2.

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1 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Vol m Company Update, Better World Green (BWG TB) Buy Industrial - Environment Control Target Price: THB3.10 Market Cap: USD49.1m Price: THB2.12 From Trash To Cash Macro Risks Growth Value Better World Green PCL (BWG TB) Price Close Relative to Stock Exchange of Thailand Index (RHS) We initiation coverage on Better World Green (BWG), a leading waste management service provider in Thailand, with a BUY call. We like BWG for its high growth potential on the back of a new renewable energy project as well as on Thailand s increasing industrial waste. We expect its sales to grow by 26% in 2013 and 40% in Our THB3.10 TP provides a 38% upside potential Source: Bloomberg Avg Turnover (THB/USD) 141m/4.81m Cons. Upside (%) 74.5 Upside (%) wk Price low/high (THB) Free float (%) 92 Shareholders (%) Suwat Luengviriya 5.7 Sippakorn Kaosa-ard 3.6 Charassri Pongpirodom 2.9 Shariah compliant Kowit Pongwinyoo kowit.po@th.oskgroup.com Chun Phokaisawan chun.ph@th.oskgroup.com Growing demand for waste management. Given that the Thai economy is growing at the rate of 4.5%-5.0% in 2013, we expect Thai manufacturers to produce around 34m tonnes of industrial waste this year. However, BWG, which is the biggest player in the industry, processed only around 0.4m tonnes of industrial waste in Therefore, there is room aplenty for BWG to grow its business in the future. Moreover, the Government is now more focused on the issue of illegal dumping of industrial waste and plans to enforce more severe punishment. Consequently, we believe the company will benefit from the growing economy and stricter Government environmental policies. RDF project. BWG is starting a new renewable energy project to produce refused-derived fuel (RDF), an alternative fuel, by shredding and dehydrating industrial waste. RDF produced from this project can be used as substitute source of fuel in coal power plants and will be sold at THB1,000-THB1,500 per tonne. The RDF project is expected to account for around 16% of BWG s total FY14 revenue. As around 80% of new incoming waste will be used to produce RDF, this project will also reduce the amount of waste going into the landfill and free up landfill space. Expanding into electric power plant. BWG is planning to create a JV with a foreign company to build 10 electrical power plants (10MW per plant) in Thailand within the next three to five years. The new power plants will use RDF as fuel and have the capacity to operate 24 hours a day. We believe this project will provide additional value of around THB0.30/share. However, as the project is only expected to start in 2015, we treat it as a potential upside to our TP and have not included it in our model. quis dolor. Nunc malesuada enim placerat mi euismod molestie. In hac Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover (THBm) 713 1,051 1,057 1,333 1,934 Reported net profit (THBm) Recurring net profit (THBm) Recurring net profit growth (%) na (22.1) Core EPS (THB) DPS (THB) Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) EV/EBITDA (x) Net debt to equity (%) net cash Our vs consensus EPS (%) See important disclosures at the end of this report Powered by Enhanced Datasystems EFA TM Platform 1

2 Better World Green (BWG TB) From Trash To Cash Target customers. BWG s target customers are mid- to large-size manufacturers, which are located in central and eastern regions of Thailand. In 2012, 70% of its customers are manufacturers of electronic appliance and automobile parts located in the industrial estates such as Rojana industrial estate, Hi-tech industrial estate, and Bang-pa-in industrial estate. Going forward, the company plans to further expand its customer base by providing its service to communities in the suburban areas. Specifically, the company plans to either build waste management center for the community or provide consultation services only. Competition in the industry. Since an industrial waste management company needs to have approvals from both the Environmental Impact Assessments (EIA) and Health Impact Assessments (HIA), the industry has a high barrier to entry and a limited number of players. BWG only has two major rivals in the industry Professional Waste Technology (PRO) and The General Environmental Conservation (GENCO). BWG is the biggest player in the market with a share of around 50%. According to Thailand s Ministry of Industry, Thai manufacturers produced around 27m tonnes of waste in 2011, while the three major players in the waste management industry processed a combined total of around 0.8m tonnes of waste in the same year. Furthermore, the three players processing plants are located in different regions of the country. Therefore, the competition in the industry is still low and there is enough room for all of the players in the industry to grow their businesses. We believe there will not be many new players in the industry as it requires a significant amount of initial investment and a high level of expertise. Robust 1Q13 result. 1Q13 sales rose 10% y-o-y to THB289m while gross margin improved to 33% (from 31% in 1Q12). We project FY13 sales to grow by 26 % y-o-y, driven mainly by the RDF project in 2H13 and the increasing amount of industrial waste. We expect gross margin to improve slightly to 30% in FY13 from 28.5% in FY12 as: i) the RDF project generates a higher margin than its existing renewable energy projects, and ii) the company is expected to resume its normal operations this year, after operations were disrupted by the massive floods in Strong balance sheet. At end-1q13, BWG had a debt-to-equity ratio of 0.32x while interest coverage ratio was 8.9x. This provides the company a war chest for its expansion plans this year. As the RDF project requires an investment of around THB500m, we believe BWG will be able to expand its business this year without needing to raise capital. Thus, there is minimal financial risk for BWG. Initiate with BUY Recommendation. Based on DCF valuation with discount rate of 10.8%, BWG s TP is THB3.10, which represents a 39% upside and 1.4% dividend yield. As its stock is currently trading at 14x FY13F P/E, a 20% discount to its regional peers, we initiate coverage on the company with a BUY recommendation. Figure 1: 1Q13 results Consolidated 1Q13 1Q12 yoy 4Q12 qoq year to 31 Dec (Btm) (Btm) %chg (Btm) % chg Sale Gross Profit Pre-tax Profit Tax (6.62) (3.85) (6.87) (3.58) Net Profit Net Profit (Ex EI) EPS(Bt) Gross margin(%) Net margin(%) Source: RHB estimates See important disclosures at the end of this report 2

3 Better World Green (BWG TB) Figure 2: Revenue breakdown Figure 3: GDP growth and Thailand s industrial waste growth 30% 18% 25% 43% 20% 17% 20% 2% 15% 10% 5% Sanitary Landfill Secure Landfill Waste water Quality Improvement Subsidiaries 0% F Industrial waste GDP Source: Company data Source: Bank of Thailand (BOT), Ministry of Industry Figure 4: Customers by region Figure 5: Sales and sales growth Bt million 2,500 % 100% 5% 2% 3% 10% 5% 75% 2,000 1,500 1,000 80% 60% 40% % Eastern Western Central Southern Northeastern Northern F 2014F 0% sale sale growth Source: Company data Source: Bank of Thailand (BOT), Ministry of Industry Figure 6: Peer comparison P/E P/BV EV/EBITDA Div yield (%) ROE (%) EPS Company 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F WASTE MANAGEMENT INC PROGRESSIVE WASTE SOLUTIONS CLEAN HARBORS INC n.a. n.a n.a TAKEEI CORP n.a. n.a BETTER WORLD GREEN PCL Source: Bloomberg See important disclosures at the end of this report 3

4 Better World Green (BWG TB) Financial Exhibits Profit & Loss (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover 713 1,051 1,057 1,333 1,934 Cost of sales (505) (734) (756) (926) (1,341) Gross profit Gen & admin expenses (81) (92) (105) (133) (193) Selling expenses (45) (67) (33) (57) (83) Other operating costs (21) (27) (34) (43) (62) Operating profit Operating EBITDA Depreciation of fixed assets (74) (120) (158) (180) (217) Operating EBIT Other recurring income Interest expense (16) (18) (19) (25) (32) Pre-tax profit Taxation (6) (9) (21) (15) (26) Minority interests (1) (13) (17) (27) (34) Profit after tax & minorities Reported net profit Recurring net profit Cash flow (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Operating profit Depreciation & amortisation Change in working capital (11) (134) (53) Other operating cash flow Operating cash flow Interest paid (16) (18) (19) (25) (32) Tax paid (10) (17) (21) (15) (26) Cash flow from operations Capex (47) (476) (145) (400) (200) Other investing cash flow Cash flow from investing activities (47) (438) (125) (396) (189) Dividends paid - (6) (36) (22) (34) Proceeds from issue of shares Increase in debt (28) 39 (39) Other financing cash flow (22) 5 (43) Cash flow from financing activities (50) 448 (118) Cash at beginning of period Total cash generated Implied cash at end of period See important disclosures at the end of this report 4

5 Better World Green (BWG TB) Financial Exhibits Balance Sheet (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total cash and equivalents Inventories Accounts receivable Other current assets Total current assets ,292 Total investments Tangible fixed assets 717 1,138 1,223 1,444 1,427 Total non-current assets 789 1,223 1,289 1,509 1,492 Total assets 1,110 1,860 1,863 2,200 2,784 Short-term debt Accounts payable Other current liabilities Total current liabilities Total long-term debt Other liabilities Total non-current liabilities Total liabilities ,076 Share capital Retained earnings reserve Other reserves Shareholders' equity 690 1,229 1,269 1,357 1,577 Minority interests Other equity (0) (0) Total equity 694 1,281 1,338 1,454 1,708 Total liabilities & equity 1,110 1,860 1,863 2,200 2,784 Key Ratios (THB) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Revenue growth (%) Operating profit growth (%) (1.6) Net profit growth (%) (22.1) EPS growth (%) (44.0) Bv per share growth (%) 6.3 (17.2) (0.5) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) (7.2) DPS Recurrent cash flow per share See important disclosures at the end of this report 5

6 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Better World Green (BWG TB) SWOT Analysis The largest industrial waste management company in Thailand. A new renewable energy project, refuse-derived fuel (RDF), will account for 16% of its sale in Legal issues brought up by the community surrounding the site. Dilutive effect from BWG-W1. To expand to electric power plant business. Diversify into community waste management business. Limited landfill space The Government s inability to enforce its regulation P/E (x) vs EPS growth P/BV (x) vs ROAE % % % % % 350% 200% % 8.0% 6.0% 4.0% 20 50% % 0-100% % P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Better World Green provides non-hazardous and hazardous industrial waste management services. See important disclosures at the end of this report 6

7 RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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