Highlights

• SPLASH: The quantum of payments from Syarikat Pengeluar Air Selangor Sdn Bhd (SPLASH) to Taliworks’ subsidiary Sungai Harmoni Sdn Bhd (SHSB) had been reduced from about 60% of the monthly billings to approximately 34% with no indication that the quantum will change in the future. We understand that operation of SHSB does not breakeven under current quantum of payments. As a result, the Sungai Selangor Phase 1 Water Treatment Plant (SSP1) is under dire condition due to lack of optimal maintenance works and may be subjected to sudden breakdown which may lead to water shortages in the Klang Valley.
• Receivables: The negotiations regarding takeover of 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. We believe that any resolution to this long drawn water saga will only gain traction post 14GE.
• Tollway: Next tariff hike is scheduled in 2020 for 51%-owned Cheras-Kajang Highway with the quantum ranging between 25%-45%. For New North Klang Straits Bypass Expressway (“NNKSB”) which Taliworks owned 45% economic interest, 20-30% tariff hike is expected to be implemented at the start of 2021.
• Waste Management: The agreed fees for SWM Environment Sdn Bhd (SWME) are subject to revision on September 2018. Consideration for the revision includes the availability of new technology to carry out the services, increased technological efficiency and specific prevailing price indices, which measures the inflation of cost components. We expect the agreed fees will remain constant in the worst case scenario and unlikely to be adjusted downwards.
• Dividend: Management has guided that Taliworks will continue to pay dividend of 2 sen per share for next 2 quarters and further dividend declarations thereafter will be reviewed based on the outcome of the takeover of SPLASH.

Risks

• Further delays in the Selangor’s water restructuring.

Forecasts

• Unchanged

Rating

Downgrade to HOLD, TP: RM1.06 ↓

• We opine that dividend may be reduced in FY18 as we deem the chances of SPLASH deal materializing before the next deadline to be highly unlikely. However, any positive news regarding Selangor water restructuring deal will provide catalyst for re-rating of share price.

Valuation

• Downgrade to HOLD with lower TP of RM1.06 as we introduce a discount of 20% to our SOP valuation after taking into account our expectation of dividend cut in the near term.

Source: Hong Leong Investment Bank Research - 30 Jan 2018