Results

• Taliworks reported 4QFY16 results with revenue of RM69m (-17.6% QoQ, -6.9% YoY) and core PATAMI of RM19.4m (+27.8% QoQ, +353.7%). The significant YoY earnings increase for the quarter was due to the contribution from newly acquired associate SWME and lower tax due to write down of deferred tax liability arising from the change in accounting policy on the amortization of Highway Development Expenditure (HDE) in the quarter.
• Cumulative 12M core PATAMI totaled RM54.3m, rising by 41.5% YoY. This strong growth was attributed to (i) 4.4% revenue increase, (ii) significant contribution from newly acquired associate SWME and (iii) lower tax due to write down of deferred tax liability arising from the change of accounting policy on the amortization of HDE.

Deviations

• 12M core PATAMI made up 92% of our full year forecast which is marginally below our expectation. This is due to (i) higher than expected operating cost in water division and (ii) higher amortization expenses due to change in accounting policy.

Dividends

• 4th interim dividend of 2.0sen/share declared, bringing full year dividend to 8.0sen/share, in line with forecast.

Highlights

• Selangor Water: We continue to expect the Selangor water sector restructuring to be settled by first half of FY17 as an independent valuation has been concluded last month and the restructuring deadline has been extended to March 2017. As at the 31th December 2016, the amount of trade receivables owed by SPLASH has ballooned to c.RM502m and this amount is about 27% of Taliworks market capitalization.
• Toll division: The commencement of Klang Valley Mass Rapid Transit (“MRT”) is expected to have a negative impact on traffic of Cheras-Kajang. We opine that actual impact may only emerge upon full operation of the KL-Kajang portion of the MRT.

Risks

• Further delays in the Selangor’s water restructuring.

Forecasts

• In view of the higher cost structure, we lower our FY17 and FY18 earnings forecasts by 3% and 2% respectively after incorporating lower operating margin and higher amortization expenses.

Rating

Maintain BUY, TP: RM1.76 (↓)

• 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

• We lower our TP to RM1.76 after incorporating lower operating margin and higher amortization expenses into our forecast. Our TP is based on SOP valuation which we deem appropriate for a company like Taliworks that is involved in different business segment.

Source: Hong Leong Investment Bank Research - 17 Feb 2017