Results

• Reported 9MFY17 gross revenue of RM236.9m (+0.5% yoy) which translated to core net profit of RM61.8m (+6.9% yoy), accounting for 80.7% and 71.7% of HLIB and consensus FY forecasts, respectively.

Deviations

• Deemed within expectation as we expect contribution from construction segment to decrease in 4Q17.

Dividends

• 3rd interim dividend of 2.0sen/share declared, representing annualised dividend of 8.0sen/share, in line with forecast.

Highlights

• YoY: Core net profit remained flattish at RM20.2m as higher operating costs in both water treatment plants were offset by higher share of results from associate company and lower financing costs.
• QoQ: Core net profit decreased by 4% due to downward revision in margin in the Ganchong-Package 3A Project, partially offset by higher contribution from both highways.
• YTD: Core net profit increased by 5.7% mainly due to full earnings contribution from newly acquired SWMH, partially offset by higher amortization expenses arising from change in the method of amortization in toll way concessions.
• Selangor Water: The negotiations regarding takeover of Syarikat Pengeluar Air Selangor Sdn Bhd (SPLASH) by the Selangor government has been postponed again until July 4, 2018. As at 30th September 2017, the amount of trade receivables owed by SPLASH has ballooned to c.RM587m and this amount is about 45% of Taliworks market capitalization.

Risks

• Failed to replenish construction segment order book
• Expiration of Taliworks Langkawi water treatment plant concession

Forecasts

• Maintained.

Rating

Maintain BUY, TP: RM1.33 ↓

• In view of the uncertainty in the SPLASH deal after numerous delays, we remove the trade receivables owed by SPLASH from our SOP valuation as we now deem the chance of the deal materializing within our valuation horizon to be highly unlikely. Nonetheless, we opine that the recent share price retracement is overly done as Taliworks is backed by solid dividend yield of c.7.5%.

Valuation

• Maintain BUY with lower SOP- driven TP of RM1.33 (from RM1.77) as we remove the trade receivables owed by SPLASH from our SOP valuation.

Source: Hong Leong Investment Bank Research - 29 Nov 2017