Taliworks reported 1QFY19 earnings of RM12m (+231% QoQ, -37% YoY) which were below our expectations and consensus. The deviation was mainly due to lower than expected share of results of associate and JVs. Total settlement sum of SPLASH’s receivables is estimated at c.RM700m and first tranche of payment (10% of settlement sum) is expected at 3Q19. Negotiation to extend concession for Langkawi’s water treatment plant is still ongoing and there would be more clarity at the end of the year. Cut FY19-20 earnings by 12-15% after factoring in lower JV contribution and higher share of losses from associates. However, TP is raised slightly to RM1.01 (from RM0.98) after factoring higher settlement sum for SPLASH. Share price has performed relatively well YTD (+26%) and we advise investors to lock in their gains. Downgrade to HOLD (from Buy).

Below expectations. Taliworks reported 1QFY19 results with revenue of RM88.9m (- 7% QoQ, -2% YoY) and core earnings of RM11.7m (+231% QoQ, -37% YoY). The latter made up 19% of our full year forecast (consensus: 7%) which is below expectations. The deviation was mainly due to lower than expected share of results of associate and JVs. 1.2 sen interim dividend was declared.

QoQ. Core PATAMI increased significantly to RM12m (from RM3.5) mainly due to lower share of losses from associate due to change of amortisation methods.

YoY. Core PATAMI decreased -37% mainly due to lower revenue from water division caused by MFRS 15, higher operating costs for both water treatment plant and higher share of losses from associate due to change of amortisation methods.

Settlement of SPLASH receivables. Taliworks has resolved its long-standing receivables related issue following execution of settlement agreement with both Air Selangor and SPLASH. Total settlement sum is estimated at c.RM700m and first tranche of payment (10% of settlement sum) is expected at 3Q19. This sum is higher than our expectation of RM638m.

Langkawi water. Negotiation to extend concession for Langkawi’s water treatment plant is still ongoing and there would be more clarity at the end of the year. We understand that capital expenditure to increase water production capacity would be required in order to extend the concession period that is expiring in October 2020. Langkawi’s division distributed RM10-15m dividend to Taliworks annually.

Dividend. Management kept a tight lip on future dividend upon resolve of SPLASH’s receivables issue but assure that current policy of 1.2 cent per quarter would be maintain. We understand that one-off special dividend is unlikely given the need to sustain business growth.

Forecast. In view of the lower than expected results, we cut FY19-20 earnings by 15.4% and 12.3% respectively after factoring in lower joint venture contribution and higher share of losses from associates. We introduce our FY21 earnings forecast of RM53.8m.

Downgrade to HOLD, TP: RM1.01. Despite the earnings cut, we raise our SOP based TP to RM1.01 (from RM0.98) after imputing the higher than expected settlement sum for SPLASH receivables. Taliworks’ share price has done relatively well this year (+25.6% YTD) and is now approaching our TP, which pretty much prices in the optimism from the finalisation of the SPLASH deal. As such, we reckon the time is rife for investors to take money off the table and downgrade our rating to HOLD (from Buy).

Source: Hong Leong Investment Bank Research - 29 May 2019