Taliworks’s 1HFY19 earnings of RM22m (-40% YoY) were below both ours and consensus expectations mainly due to higher share of losses from SWME. YTD core PATAMI decreased due to lower contribution from water segment and higher share of losses from SWME. Total settlement sum of SPLASH receivables is estimated at c.RM700m and first tranche of payment (10% of settlement sum) is expected in near term. Cut FY19-21 earnings forecast by 4- 10%. Upgrade to BUY with lower SOP-driven TP of RM0.98 (from RM1.01) despite earnings forecast adjustment as we deem the share price is at attractive level given its retracement (-7.7%) since our last downgrade and attractive dividend (6% yield) given the recent downward trend of MGS yield.

Below expectations. Taliworks reported 2QFY19 results with revenue of RM89.1m (flat QoQ, -8% YoY) and core earnings of RM10.7m (-8% QoQ, -44% YoY). This brings 1HFY19 core earnings to RM22.4m, decreasing by 40% YoY. The core earnings accounted for 44% of our full year forecast (consensus: 32%) which is below expectations. Declared 2nd interim dividend of 1.2 sen (1HFY18: 2.4 sen), going ex on 30 Oct 2019.

Deviations. The lower than expected performance was mainly due to higher share of losses from 35% associate SWME.

QoQ. Core PATAMI decreased by 8% due to higher share of losses from associate SWME.

YoY/YTD. Core PATAMI decreased by 44% and 40% both YoY and YTD respectively due to higher share of losses from associate SWME attributable to change of amortisation methods and lower contribution from water segment due to adoption of accounting standard MFRS 15.

SPLASH receivables. Total settlement sum of SPLASH receivables is estimated at c.RM700m and first tranche of payment (10% of settlement sum) is expected in the near term.

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 distributes RM10-15m dividend to Taliworks annually.

Forecast. Cut FY19-21 earnings by 9.7%, 4.3% and 5.6% respectively after taking into account higher share of losses from associate SWME.

Upgrade to BUY, TP: RM0.98. Despite the results shortfall and our lower SOP-driven TP of RM0.98 (from RM1.01), we upgrade our rating to BUY as we deem the share price is at attractive level given its retracement (-8% since our last downgrade). Furthermore, its dividend yield of 6% seems relatively attractive when stacked against the recent downtrend of the MGS yield.

Source: Hong Leong Investment Bank Research - 28 Aug 2019