Highlights

• Public utilities conglomerate. Taliworks is a conglomerate involved in water, highway concessions and waste-related businesses. Most of its operations have multiyear concession agreements with predictable rate schedules.
• Beneficiary of Selangor’s water restructuring. Taliworks has trade receivables amounting to c.RM471m owed by SPLASH. SPLASH is expected to be acquired by the Selangor state government in near term. This allows the full repayment of the abovementioned receivables by SPLASH, providing a strong boost to Taliworks’ cash pile.
• Diversified and stable revenue stream. Taliworks has operations spanning across different sectors which will provide them more stable earnings and less vulnerable to idiosyncratic risk.
• Remarkable growth ahead for newly acquired business. Newly acquired solid waste management operation is expected to grow by double-digit pace in the next few years due to scheduled tariff hike and operational efficiency.
• Strong relationship with EPF. Taliworks has a strong relationship with EPF and is expected to continue partnering it for future venture into acquisition of concession assets. We opine that Taliworks will enjoy a lower cost of capital by partnering with EPF.
• Potential strong growth in earnings. Taliworks will have a strong balance sheet after repayment of trade receivables by SPLASH. Assuming the entire proceeds is utilized for M&A deal which fulfils their target IRR, this will potentially add about 49% growth to EBITDA.

Risks

• Further delays in the Selangor’s water restructuring.

Forecasts

• We project FY17-18 earnings growth of 34% and 5%, driven by the performance of its concession business and new recurring income stream from newly acquired SWME. Rating Initiate with BUY, RM1.85 TP (+28% upside)
• Taliworks is an appealing investment case given its concession businesses in different sectors which enjoys stable growth profile coupled with reduced vulnerability to idiosyncratic risk. Besides, Taliworks provides investors exposure to the potential settlement of Selangor’s water restructuring and a potential huge cash pile which can increase earnings per share significantly via M&A.

Valuation

• Our SOP based TP of RM1.85 is derived based on SOP valuation which we deemed is appropriate for company like Taliworks that involved in different business segment.
• At current price the projected dividend yield of Taliworks is about 5.5% for FY17 which we believe will provide a decent support to the share price.

Source: Hong Leong Investment Bank Research - 18 Jan 2017