Taliworks’s 1QFY20 core PATAMI of RM12.5m (-6% YoY) was below ours and consensus expectations mainly due to lower than expected construction progress billings and traffic volume. Water segment saw a 2% increase in consumption volume driven by household demand during the MCO. Cut earnings by 1-8%. Maintain BUY with lower SOP-driven TP of RM1.00. We like the stock for its defensive earnings profile and potential upside to our estimated dividend yield of 7.2% for FY20-21.

Below expectations. Taliworks reported 1QFY20 results with revenue of RM84.3m (- 20% QoQ, -5% YoY) and core earnings of RM12.5m (+14% QoQ, -6% YoY). The core earnings accounted for 18% of our full year forecast (consensus: 16%) which is below expectations. Note that 1QFY20 core earnings have been adjusted for dividends from investments designated at fair value amounting to RM3.4m as cash from previously securitised SPLASH receivables were deployed as investments.

Deviations. The results shortfall was mainly due to slower than expected construction progress billings as works were halted during the MCO. Partially compounding the shortfall was lower than forecasted traffic volume for its tolled highways.

Dividends. First interim DPS of 1.65 sen was declared for the quarter (going ex on 29 May 2020). This marks the second consecutive quarter of higher DPS post securitisation of SPLASH receivables (previously paid 1.2 sen quarterly DPS).

QoQ. Core PATAMI increased by 14% mainly due to lower taxes and minority interests (lower toll road contribution) during the quarter.

YoY. Core PATAMI declined by 6% in tandem with lower revenue for the quarter (-5% YoY). Considerably contributing to the decline was the construction segment as Langat 2 and Ganchong water treatment projects were substantially completed in 2019 compounded by cessation of works due to the MCO. Revenue contribution from toll highways fell as average daily traffic declined 13% YoY.

Water segment. Its bread and butter water segment saw a marginal revenue decline (-2% YoY) largely driven by lower bulk sales rate (BSR) from RM0.46/m3 to RM0.41/m3 for SSP1 as the new O&M agreement (BWSA) was executed effective Sept-19. The BWSA will see a 2.4% BSR hike in 2023 with subsequent hikes coming in 2028 (+4.2%) and 2030 (+5%). Interestingly, its average million litres per day (MLD) grew by c.1.8% YoY despite the MCO as higher household water consumption offset weaker commercial and industrial demand. We reckon its resilient water segment will support Taliworks’s cash generating capacity despite the MCO.

Langkawi concession. Its concession agreement for Langkawi is slated to end in Oct-2020. Based on previous guidance, Langkawi contributes c.10-15m dividends to Taliworks annually. Nevertheless, the Selangor water restructuring has resulted in nearly 100% of water sales under the BWSA paid in cash whereas previously, only one-third was in cash. In our estimation, this more than offsets Langkawi’s potential absence of dividend contribution. Hence, we do not view this as a material risk to its dividend paying capabilities going forward.

Forecast. Cut FY20-21 earnings by 8.4% and 0.6% after imputing lower traffic volume estimates to account for the lockdown.

Maintain BUY, TP: RM1.00. Maintain BUY with lower SOP-driven TP of RM1.00 post-earnings cut. We like the stock for its defensive earnings profile and potential upside to our estimated dividend yield of 7.2% for both FY20-21.

Source: Hong Leong Investment Bank Research - 14 May 2020