Taliworks was offered to settle its outstanding receivables owed by SPLASH and enter into new O&M agreement of SSP1. Receivables owed by SPLASH will be settle with 90% of outstanding balance, structured with an upfront payment of 10% and 9 subsequent equal annual instalments with interest accrue. New O&M agreement involves lower BSR rate but longer concession period, hence neutral to overall NPV. Cut FY19-20 earnings forecast by 14% and 7% respectively after imputed new BSR rate. Upgrade to BUY with higher SOP driven TP of RM1.33 (from RM1.29) as the settlement terms are above our expectations.

NEWSBREAK

Settlement of receivables and new O&M agreement. Taliworks has received a letter of offer from Air Selangor regarding settlement of outstanding receivables arising from its operation of SSP1 and new O&M agreement of SSP1 post acquisition of SPLASH. Receivables owed by SPLASH will be first settled with an amount equal to 90% of outstanding balance (c.RM600m or 50 sen per share). The settlement will be structured with an upfront payment of 10% and 9 subsequent equal annual instalments with interest accrue at the rate of 5.25% per annum. Taliworks is then required to terminate existing O&M contract and enter into a new agreement. The bulk water supply rate (BSR) under the new agreement will be a rate equal to a 5 sen/m3 reduction to the existing BSR. The concession period of new agreement is being extended from 2029 to 2036 with a final BSR rate of 52.5 sen/m3 for the extension period.

HLIB’s VIEW

Positive surprise. We are pleasantly surprised by this announcement given lower than expected discount of receivables and longer concession period of new O&M agreement. Although magnitude of upfront payment is much lower than expected, overall settlement structure is still above our expectations.

NPV neutral. Reduction of BSR in new agreement is being compensated by extension of concession period from 2029 to 2036 and thus the new O&M contract is NPV neutral based on our estimates.

Lump-sum or staggered? We expect distribution of special dividend post settlement of outstanding receivables but are uncertain of the magnitude and the structure of it. If management chooses to factor the receivables (i.e. sell the receivables and receive the entire sum upfront at a discount), Taliworks can potentially receive c.RM480m or 40 cents per share lump-sum upfront from third party institutions assuming a required rate of return of 10%. If management follows the proposed repayment schedule, we expect the company would distribute total 12 cents dividend annually compare with 8 cents currently. We also do not discount the possibility of combination of partial lump sum special dividend together with higher annual dividend going forward.

Forecast. Cut FY19-20 earnings forecast by 14% and 7% respectively after imputed new BSR rate. We expect Taliworks to write back c.RM100m of receivables net off tax impact.

Upgrade to BUY, TP: RM1.33. Upgrade to BUY with higher SOP-driven TP of RM1.33 as the receivables settlement terms are above our expectations and hence, higher amount of potential special dividend is expected. Moreover, longer concession period under new O&M contract of SSP1 further improves earnings visibility of Taliworks. We roll forward our valuation horizon from FY18 to FY19.

Source: Hong Leong Investment Bank Research - 23 Aug 2018