Taliworks’s 1HFY18 earnings of RM37.3m (-10% YoY) were within both our and consensus estimates. YTD core PATAMI decreased due to lower contribution from construction segment and share of losses from associate. Taliworks has accepted new O&M contract offer for SSP1 from Air Selangor and management guided that the whole water consolidation exercise should be completed by 1st January 2019 if everything goes on schedule. Settlement sum for outstanding receivables is about RM650m (54 cents per share) which is 8% higher than our original estimates. Maintained forecast. Maintain BUY rating with higher SOP driven TP of RM1.66 (from RM1.33) after we removed the 20% discount on our SOP valuation in view of clearer earnings prospect and potential of higher dividend.

Within expectations. Taliworks reported 2QFY18 results with revenue of RM178.8m (+19% QoQ, +6% YoY) and core earnings of RM18.9m (+3% QoQ, -10% YoY). This brings 1HFY18 core earnings to RM37.3m, decreasing by 10% YoY. 1H core earnings accounted for 51% and 50% of HLIB and consensus full year forecast respectively, within ours and consensus estimates. 2 cents interim dividend was declared.

QoQ. Core PATAMI increased by 3% mainly due to higher contribution from construction segment arising from higher revenue recognised in Langat 2 Package 7 Balancing Reservoir Project.

YoY/ YTD. Core PATAMI decreased by 10% both YoY and YTD mainly due to lower contribution from construction segment and share of losses from associate.

Accepted offer from Air Selangor. Taliworks has accepted new O&M contract offer for SSP1 from Air Selangor and management guided that the whole water consolidation exercise should be completed by 1st January 2019 if everything goes on schedule.

Higher than expected settlement sum. Assuming the agreed cut-off date for the outstanding receivables is 30 November 2018 and the repayment schedule for current invoice amount unchanged (34%), the total gross receivables accumulate is expected to be RM723m. The 10% discount on the outstanding receivable will be c.RM72m with the settlement sum at c.RM650m (54 cents per share). This is c.8% higher than our expected amount. As such, the expected write back on P&L is c.RM86m.

Langkawi water: Taliworks concession of managing water supply in Langkawi is expiring in October 2020 and management is pursuing alternative to extend the concession. The EBITDA contribution from Langkawi water concession is about RM20m annually.

Forecast. Maintained as the Results Were Inline.

Maintain BUY, TP: RM1.66. Maintain BUY rating with higher SOP-driven TP of RM1.66 (from RM1.33) after we removed the 20% discount on our SOP valuation in view of clearer earnings prospect and potential of higher dividend. We assume that If management follows the repayment schedule proposed by Air Selangor, the company would distribute total 12 cents dividend annually which translates to c.10% dividend yield based on current share price. We also do not discount the possibility of lump sum upfront special dividend if management choose to monetize the receivables with third party institutions.

Source: Hong Leong Investment Bank Research - 28 Aug 2018