Taliworks will be receiving an upfront sum equal to 10% of the settlement sum (RM720m) under the Termination and Settlement Agreement (TSA) no later than 14 days from Sept 12 following the completion of the SPLASH deal, while the balance settlement sum with interest of 5.25% per annum will be payable in nine annual instalment. We understand that the receivables would be securitised in order to get the one-off upfront lump sum amount for M&A and to increase dividend payout. We understand that management prefers to increase quarterly dividend from current level of 1.2 sen instead of one-off special dividend and the increase in the dividend would be at least double-digits percentage wise. Maintain forecast. Maintain BUY with unchanged SOP-driven TP of RM0.98.

Taliworks Held An Investor’s Briefing Yesterday With the Following Key Takeaways:

Agreement becomes unconditional. The agreements entered into by Sungai Harmoni in relation to the operations and maintenance of the Sungai Selangor Water Treatment Plant Works Phase (SSP1) has become unconditional and been completed. As a results, Taliworks will be receiving an upfront sum equal to 10% of the settlement sum under the Termination and Settlement Agreement (TSA) no later than 14 days from Sept 12, while the balance settlement sum with interest of 5.25% per annum will be payable in nine annual instalments.

Monetisation of the receivables expected. We understand that the total amount of settlement sum (net of 10% discount) is estimated at RM720m. Management guided that securitisation of the receivables is preferred in order to get the one-off upfront lump sum amount for M&A and to increase dividend payout. We do not expect a huge discount on the securitised receivables amount as the remaining settlement sum is interest accrued with interest rate of 5.25% which was determined last year when the MGS yield was higher.

Special dividend? Utilization of the settlement sum was the focus of the briefing following completion of the deal. We understand that management prefers to increase quarterly dividend payout from current level of 1.2 sen instead of one-off special dividend and the increase in the dividend would be at least double-digits percentage wise. Taliworks would also retain a portion of the settlement sum to get ready for inorganic growth with the focus on domestic water capex opportunities.

Langkawi water. Negotiation to extend concession for Langkawi’s water treatment plant that is expiring in October 2020 is still ongoing but we understand that the probabilities of extension are slim. This is due to budget constraints of the state government to incur capital expenditure amounting between RM300m to RM1bn to increase water production capacity. Langkawi’s division distributed RM10-15m dividend to Taliworks annually.

Tollway. Next tariff hike is scheduled in 2020 for 51%-owned Cheras-Kajang Highway with the quantum ranging between 25%-45%. For New North Klang Straits Bypass Expressway (“NNKSB”) which Taliworks owns a 45% economic interest, 20-30% tariff hike is expected to be implemented at the start of 2021.

Forecast. Maintain as the briefing yielded no surprise.

Maintain BUY, TP: RM0.98. Maintain BUY with unchanged SOP-driven TP of RM0.98. We like the stock given its earnings stability and attractive dividend (c.6% yield) given recent downward trend of MGS yield.

Source: Hong Leong Investment Bank Research - 18 Sept 2019