Taliwork’s 1QFY18 core net profit of RM18.4m was below HLIB and consensus estimates. Core net profit decreased 12.6% YoY mainly due to lower construction revenue and lower share of results of associate SWMH. We opine that the federal administration change is positive for the company as we expect the Selangor state water industry restructuring exercise to be finalised soon and a potential dividend bonanza can be expected. As at 31st March 2018, the receivables owed by SPLASH to Taliworks stood at RM638.0m, accounting to c.58% of the latter’s market cap. Reduced FY18-19 forecast by 9.1% and 20.7% respectively after imputing lower share of results of associate assumptions. We upgrade the stock to BUY rating but with lower TP of RM1.00 based on the expectation that Selangor water deal will be resolved soon.

Results below expectations. 1Q18 core net profit came in at RM18.4m, accounting for 22.8% of HLIB and 23.4% of consensus estimates. This is due to lower than expected share of results of associate.

Dividends. Declared an interim dividend of 2 sen/share.

YoY: Core net profit decreased 12.6% mainly due to lower construction revenue and lower share of results of associate SWMH that was attributed to higher depreciation and hiring cost as well as higher amortisation of intangible assets.

QoQ: Core net profit slightly decreased by 1.1% mainly due to downward revision in the construction cost of Mengkuang Dam Expansion Project which resulted in higher profit recognised for the construction activities in 4Q17.

SPLASH. Management is optimistic towards the resolution of Selangor state water industry restructuring exercise as the exercise has been given priority by the state government following changes in the federal administration post GE14. As at 31st March 2018, the receivables owed by SPLASH to Taliworks stood at RM638.0m, accounting to c.58% of market capitalisation of the company.

Outlook. We deem overall net impact from changing of government positive for Taliworks. This is because we expect Selangor state water industry restructuring exercise to be finalised soon and a potential dividend bonanza can be expected from the company. However this positive impact is partially offset by uncertainty hovering around the promise of abolishment of tolls by the new administration. To recap, Taliworks has 51% interest in Cheras- Kajang highway and 45% economic interest in New North Klang Straits Bypass Expressway.

Forecast. Reduced FY18-19 forecast by 9.1% and 20.7% respectively after imputing lower share of results of associate assumptions. We introduce our FY20 earnings forecast of RM109.1m.

Upgrade to BUY, TP: RM1.00. Upgrade to BUY with lower SOP-driven TP of RM1.00 (from RM1.06) after earnings forecast adjustment. We deem the possibility of finalization of Selangor water deal highly likely in the near term following changes in the federal administration. Moreover, we opine that the recent sell down of Taliworks stock is overdone as the market is only focusing on uncertainty around the potential abolishment of tolls and has forgotten that the company is also a huge beneficiary of the Selangor water restructuring deal. Our TP is extremely conservative as we do not include the huge amount of receivables owed by SPLASH into our SOP valuation and hence is subject to huge upward revision once the deal is being finalized.

Source: Hong Leong Investment Bank Research - 22 May 2018