Taliworks’s FY18 earnings of RM60.5m (-25% YoY) were below both ours and consensus estimates. YTD core PATAMI decreased due to lower contribution from associate which was caused by changing in amortisation method. Outstanding receivables owed by SPLASH current stands at c.RM732m, amounted to 42% of Taliworks current market capitalization. Cut FY19-20 earnings by 16% and 24% respectively after adjusted downwards share of profits from associates. Maintain BUY rating with lower SOP-driven TP of RM0.99 (from RM1.01). Assuming that management follows the repayment schedule proposed by Air Selangor, the company would distribute total 7.2 cents dividend annually which translates to 8.4% of dividend yield based on current share price.

Below expectations. Taliworks reported 4QFY18 results with revenue of RM97.9m (- 0.4% QoQ, -25.6% YoY) and core earnings of RM3.5m (-82% QoQ, -81% YoY). This brings FY18 core earnings to RM60.5m, decreasing by 25% YoY. FY18 core earnings accounted for 81% and 80% of HLIB and consensus full year forecast respectively, below ours and consensus estimates. 1.2 cents final dividend was declared.

Deviations. Results were below expectations mainly due to lower share of profits from associates which was caused by changing in amortisation method. We opine that this would not affect dividend payout capability of Taliworks as this is just non cash accounting treatment and most of the operating profits are from water and toll concessions which performance remains intact.

Extension of SPLASH deal. SPLASH deal was extended again to 31st March but we deem this is not major concern as the deal just needs more time to complete as opposed to the risk of falling out. Outstanding receivables owed by SPLASH current stands at c.RM732m, amounted to 42% of Taliworks current market capitalization.

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. Cut FY19-20 earnings by 16% and 24% respectively after adjusted downwards share of profits from associates.

Maintain BUY, TP: RM0.99. Maintain BUY rating with lower SOP-driven TP of RM0.99 (from RM1.01). Assuming that management follows the repayment schedule proposed by Air Selangor, the company would distribute total 7.2 cents dividend annually which translates to 8.4% of dividend yield based on current share price. We also do not discount the possibility of lump-sum upfront special dividend if management chooses to monetize the receivables with third party institutions.

Source: Hong Leong Investment Bank Research - 1 Mar 2019