Resilient Amidst Uncertainties

Taliworks’s 1HFY20 core PATAMI of RM27.6m (+7% YoY) was within ours and consensus expectations. Water segment saw a marginal decline in consumption volume cushioned by household demand during the MCO. Maintain earnings forecasts. Maintain BUY with same SOP-driven TP of RM1.00. We like the stock for its defensive earnings profile and attractive dividend yields of 7.8% for FY20-21.

Within expectations. Taliworks reported 2QFY20 results with revenue of RM76.1m (- 10% QoQ, -15% YoY) and core earnings of RM11.7m (-26% QoQ, -6% YoY). This brings 1HFY20 core earnings to RM27.6m, increasing by 6.7%. The core earnings accounted for 44% of our and consensus full year forecast which we deem to be in line with expectations given that MCO was imposed in 2Q.

Dividends. Second interim DPS of 1.65 sen was declared for the quarter (going ex on 7 Sept 2020). This marks the third consecutive quarter of higher DPS post securitisation of SPLASH receivables (previously paid 1.2 sen quarterly DPS).

QoQ. Core PATAMI declined by 26% mainly due to lower topline (-10%) resulting from lower topline contributions from water (-6%) and toll (-30%) segments during the quarter resulting from the lockdown. ADT at Grand Sepadu and Cheras -Kajang both saw declines of 27% and 38% respectively. This seems to indicate a rather quick recovery in traffic volumes once the lockdown was lifted.

YoY. Core PATAMI declined by 6% in tandem with lower revenue for the quarter (- 15%). Contributing to the decline was the tolls segment as peak lockdown was reflected in 2Q20. ADT at Grand Sepadu and Cheras-Kajang both saw declines of 39% and 46% respectively.

YTD. Core PATAMI increased by 7% mainly driven by higher dividend income from investments resulting from deploying its receipt of SPLASH receivables as investments.

Water segment. Its bread and butter water segment saw a revenue decline of -6.7% YTD (ex. impact of MFRS15) 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 the range of 4-5%. Its average MLD decline by 0.7% as Langkawi saw a drastic reduction (-7.7%) as a result of the MCO where there was a significant reduction in the number of tourists to Langkawi.

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. Maintain Forecasts as Earnings Are Inline.

Maintain BUY, TP: RM1.00. Maintain BUY with unchanged SOP-driven TP of RM1.00. We like the stock for its defensive earnings profile and strong yields of 7.8% for FY20-22. Yield differential against MGS has been increasing on the back of its downtrend in FY20.

Source: Hong Leong Investment Bank Research - 21 Aug 2020