Management is cautiously optimistic towards the resolution of Selangor state water industry restructuring exercise as both federal and Selangor state government are under the same coalition and hence, any future negotiations and discrepancy regarding the issue are expected to be reconciled more easily. As at 31st March 2018, the amount of trade receivables owed by SPLASH has ballooned to c.RM638m, amounting to c.65% of Taliworks’ market cap. We understand that the discussion between the company and government regarding toll abolishment issue is still at preliminary stage at this juncture and hence we retain our forecast on the company’s toll division. Maintain forecast and BUY with unchanged SOP-driven TP of RM1.00

SPLASH. Management is cautiously optimistic towards the resolution of Selangor’s water industry restructuring exercise as both federal and Selangor state government are under the same coalition and hence any future negotiations and discrepancy regarding the issue are expected to be reconciled more easily. However management is still unsure about the timing of the deal as it has to be renegotiating following the change in federal government.

Receivables. The negotiations regarding takeover of SPLASH by the Selangor government has been postponed until 4 July 2018. As at 31 March 2018, the amount of trade receivables owed by SPLASH has ballooned to c.RM638m, amounting to c.65% of market capitalisation of the company. We opine that the deadline is likely to be delayed again given the fact that a full cabinet is not established yet and the new Menteri Besar of Selangor has yet to be determined.

Tripartite agreement. Post finalization of SPLASH deal, we believe Taliworks will continue to run the operations and maintenance (O&M) operations for SSP1 water treatment plant. This is because a Tripartite agreement had been signed between the Selangor state government, SPLASH and Taliworks. The said agreement allows Taliworks to negotiate directly with Selangor government, should SPLASH no longer require its services. However, we do not discount the possibility that there could be changes to the terms under current agreement that is expiring in 2030.

Langkawi water. The company is negotiating for the extension of Taliworks Langkawi water concession which expires in October 2020. Expiry of this concession is estimated to cost the company about c.RM15m on EBITDA level and our forecast model had imputed the assumption of expiry of the concession.

Toll abolishment. We understand that the discussion between the company and government regarding toll abolishment issue is still at preliminary stage at this juncture and hence we maintain our forecast on the company’s toll division. We opine that a full toll abolishment without fair compensation scenario is unlikely as this will spook investor confidence which may affect funding for future infrastructure development plan.

Forecast. Maintained as our meeting with management did not yield any major surprises.

Maintain BUY, TP: RM1.00. Maintain BUY with unchanged SOP-driven TP of RM1.00. We deem the possibility of finalization of Selangor water deal highly likely in the near term following changes in the federal administration. Our TP is 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 - 8 Jun 2018