Taliworks’s 9MFY19 core earnings of RM36m (-36% YoY) were above our expectations (but below consensus) mainly due to lower-than-projected operating costs. YTD core PATAMI decreased due to lower contribution from construction segment and higher share of losses from SWME. Total settlement sum of SPLASH receivables is estimated at c.RM720m (net of 10% discount) with securitization of the amount in the near term. Increase FY19-21 earnings by 2-5%. Maintain BUY with higher SOP-driven TP of RM1.02. We like the stock for its stable earnings profile and potential upside to our estimated dividend yield of 6-7% for FY19-21.

Above expectations. Taliworks reported 3QFY19 results with revenue of RM93.6m (+5% QoQ, -5% YoY) and core earnings of RM14.2m (+33% QoQ, -28% YoY). This brings 9MFY19 core earnings to RM36.6m, decreasing by 36% YoY. The core earnings accounted for 79% of our full year forecast (consensus: 60%) which is above our but below consensus expectations. Note that 9MFY19 core earnings have been adjusted for net EI of RM58m relating to reversal and gain on trade receivables due from SPLASH as well as waiver for trade payables. Declared 3rd interim dividend of 1.2 sen bringing 9MFY19 amount to 3.6 sen (9MFY18: 5.2 sen).

Deviations. The positive results surprise was mainly due to lower-than-projected operating expenses.

QoQ. Core PATAMI increased by 33% mainly due to lower share of losses from associate SWME during the quarter.

YoY/YTD. Core PATAMI decreased by 28% and 36% both YoY and YTD respectively due to (i) lower contribution from construction segment as a result of completion of new access to NNKSB in 3QFY19, (ii) slower work progress at Langat 2, (iii) higher share of losses from associate SWME attributable to change of amortisation methods and (iv) lower contribution from water segment due to adoption of accounting standard MFRS 15.

SPLASH receivables. The total settlement sum of SPLASH receivables is estimated at c.RM720m (net of 10% discount). Management guided for a securitization of the outstanding amount to be deployed through sustainably higher dividend payouts and potential M&A opportunities. The potential quantum of increase in dividends was guided to be “double digits in percentage”.

Ongoing negotiations. 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. Elsewhere, for its toll division, negotiations are ongoing with the Federal government to which no resolution has been reached.

Forecast. Increase FY19-21 earnings by 4.6%, 3.4% and 1.8% respectively after taking into account lower operating expenses.

Maintain BUY, TP: RM1.02. Maintain BUY with higher SOP-driven TP of RM1.02 following earnings adjustment. We like the stock for its stable earnings profile and potential upside to our estimated dividend yield of 6.1% for FY19 and 6.7% for both FY20-21.

Source: Hong Leong Investment Bank Research - 4 Dec 2019