Taliworks’s 9MFY18 earnings of RM57.0m (-8% YoY) were within both our and consensus estimates. YTD core PATAMI decreased due to lower contribution from associate. Taliworks is expected to benefit from rollout of water infrastructure projects given its experience in construction of water infrastructures and its role as O&M operator for SSP1 in Selangor. Maintained forecast and BUY rating with unchanged SOP-driven TP of RM1.01. Management guided that the Selangor water consolidation exercise should be completed by 1st January 2019 if everything goes on schedule. Assuming that management follows the repayment schedule proposed by Air Selangor, the company would distribute total 7.2 cents dividend annually which translates to 8.6% of dividend yield based on current share price.

Within expectations. Taliworks reported 3QFY18 results with revenue of RM98.4m (+1% QoQ, +32% YoY) and core earnings of RM19.7m (+4% QoQ, -3% YoY). This brings 9MFY18 core earnings to RM57.0m, decreasing by 8% YoY. 9M core earnings accounted for 76% and 75% of HLIB and consensus full year forecast respectively, within ours and consensus estimates. 1.2 cents interim dividend was declared.

QoQ. Core PATAMI increased by 4% mainly due to higher share of results of JV arising from the receipt of toll compensation coupled with lower share of loss results from associate due to reversal of over-recognised expenses.

YoY/ YTD. Core PATAMI decreased by 3% and 8% YoY and YTD respectively mainly due to lower contribution from associate.

Beneficiary of water projects. Following the change in government post GE14, the domestic construction industry prospects has turned gloomy following review and cancellation of mega projects. Nonetheless, water related infrastructure projects in low reserve margin states such as Kedah and Selangor are given priority as mentioned in 11th Malaysia Plan Mid-term Review. As such, Taliworks is expected to benefit from rollout of water infrastructure projects given its experience in construction of water infrastructures and its role as O&M operator for SSP1 in Selangor.

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: RM1.01. Maintain BUY rating with unchanged SOP-driven TP of RM1.01. Management guided that the whole Selangor water consolidation exercise should be completed by 1st January 2019 if everything goes on schedule. Assuming that management follows the repayment schedule proposed by Air Selangor, the company would distribute total 7.2 cents dividend annually which translates to 8.6% of 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 - 27 Nov 2018