Highlights

• SPLASH: Management expects the Selangor water sector restructuring to be settled by April, barring any unforeseen circumstances. This is due to the fact that an independent valuation has been carried out to determine the value of SPLASH according to its net book value. The valuation was reported to have been concluded last month.
• Valuation: Management believes the resulting valuation of SPLASH should approximate its net book value, which is about RM2.8bn according to the latter.
• Receivables: Post completion of the water sector restructuring, Taliworks is expecting to recover the trade receivables owed by SPLASH, most probably through a multi-year repayment scheme with interest accrued on any outstanding balance.
• Special Dividend: Management opined that they prefer to reward shareholders through sustainable growth in dividend rather than any one-off special dividend after recouping the said trade receivables. However, they do not fully discount the possibility of a special dividend. As at the 30th Sept 2016, Taliworks has trade receivables owed by SPLASH amounting to c.RM471m and this amount is about 26% of the former’s market capitalisation.
• Potential extension of SSP1 O&M agreement: The O&M agreement of SSP1 is expiring in 2030 and Taliworks is looking forward to decrease the bulk sale rate post completion of water sector restructuring in return for extension of the agreement. Management expects that this exercise is NPV neutral and hence we maintain our forecast.
• Langkawi water: Taliworks concession of managing water supply in Langkawi is expiring in October 2020 and management is pursuing alternatives to extend the concession. The net profit contribution from Langkawi water concession is about RM15m annually.

Risks

• Further delays in the Selangor’s water restructuring.

Forecasts

• Unchanged

Rating

Maintain BUY, TP: RM1.85

• The settlement of Selangor water sector restructuring has never been closer and we believe this will be the key rerating catalyst. Besides, there is also a potential upside from the issuance of a special dividend should the deal push through.

Valuation

• Our unchanged TP of RM1.85 is based on the SOP valuation which we deem appropriate for a company like Taliworks that is involved in different business segment.
• At current price, the projected dividend yield of Taliworks is about 5.4% for FY17 which we deem attractive under current low-interest rate environment.

Source: Hong Leong Investment Bank Research - 08 Feb 2017