Taliworks’s 9MFY20 core PATAMI of RM43.8m (-0.2%) was marginally below ours and consensus expectations due to recent imposition of CMCO. DPS of 1.65 sen was declared for the quarter. Water segment was resilient with volume largely sustaining whereas revenue decline stems from lower BSR rates. Cut FY20-22 earnings by -4.4/-1.9/-0.3%. Maintain BUY with lower SOP-driven TP of RM0.99. Stock provides defensive earnings profile and attractive dividend yields of 8.3% for FY20-21.

Marginally below. Taliworks reported 3QFY20 results with revenue of RM82.6m (+9% QoQ, -12% YoY) and core earnings of RM16.2m (+38% QoQ, -10% YoY). This brings 9MFY20 core earnings to RM43.8, decreasing slightly by -0.2% YoY. The core earnings accounted for 71% and 68% of our and consensus full year forecasts which is marginally below expectations given the imposition of CMCO will likely lead to a softer finish to the year vs our initial expectations.

Dividends. Third interim DPS of 1.65 sen was declared for the quarter (going ex. on 1 Dec 2020). This marks the fourth consecutive quarter of higher DPS postsecuritisation of SPLASH receivables (previously paid 1.2 sen quarterly DPS).

QoQ. Core PATAMI rebounded by 38% mainly due to topline recovery (+9%) as revenue contribution from its toll highways recovered (+57%) more than offsetting the marginal topline decline at its water segment (-2%). Traffic volumes recovered significantly QoQ where ADT at Cheras - Kajang and Grand Sepadu highways increased by 77% and 53% respectively. Partially contributing to better QoQ performance was the incurrence of termination costs at Langkawi in 2QFY20.

YoY. Core PATAMI declined by -10% as the quarter saw revenue declining by -12%. Declines are largely attributed to the water (-12%) and toll (-4%) segments while decline in construction was marginal. ADT at its Grand Saga and Grand Sepadu highways are lower at -3% and -6% respectively as 3QFY20 was under RMCO. With the imposition of the CMCO, there should be slight ADT drop-off going into 4QFY20.

YTD. Core PATAMI was flat at -0.2% as leaner costs structure coupled with higher investment dividends (post-securitisation) mitigated the impact of revenue decline (- 11%) brought upon by lower water BSR rates and various forms of MCOs. Proportionally lower contribution from highways also reduced MI leakage in 9MFY20.

Water segment. Revenue decline by -8% YoY (ex. 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 -3% with Langkawi seeing a reduction of -6% due to a reduction in tourists to Langkawi.

Langkawi concession ended. Its concession agreement for Langkawi ended in Oct2020. We expect dividend payments to sustain despite Langkawi’s absence as prompt payments from the new BWSA have significantly improved Taliworks’s cash generation. Hence, we do not view this as a risk to its dividend paying capabilities in the near term.

Forecast. Cut FY20-22 earnings by -4.4/-1.9/-0.3% after adjusting traffic volume assumptions downwards in light of the CMCO.

Maintain BUY, TP: RM0.99. Maintain BUY with lower SOP-driven TP of RM0.99. We like the stock for its defensive earnings profile and strong yields of 8.3% for FY20-22. Yield differential against MGS has been increasing on the latter’s downtrend in FY20.

Source: Hong Leong Investment Bank Research - 17 Nov 2020