Taliworks’s 1QFY21 core PATAMI of RM12m (-21% QoQ, -22% YoY) was within ours but below consensus expectations. Performance was dragged by cessation of Taliworks Langkawi and lower ADT. We view Taliworks as a natural candidate to secure work from various WTP contracts in the pipeline. Tweak FY22 earnings upwards by 2%. Maintain BUY with same SOP-driven TP of RM0.99. Stock presents an attractive dividend yield of 7.9% for FY21-22.

Meeting expectations. Taliworks reported 1QFY21 results with revenue of RM65.6m (-12% QoQ, -22% YoY) and core earnings of RM12.4m (-21% QoQ, -22% YoY). The core earnings accounted for 24% and 20% of our and consensus full year numbers respectively. Performance was within our but fell below consensus expectations.

Dividends. DPS of 1.65 sen was declared for the quarter (going ex on 3 June 2021). Dividend payment is inline with our expectations of 1.65 sen per quarter.

QoQ. Core PATAMI declined by -21% on the back of lower share of JV contribution in relation to Grand Sepadu which received a RM17m toll compensation in the previous quarter. However, at the EBIT level, Taliworks grew by 4% offsetting lower revenue (- 12%) in part due to restoration costs recognised for Taliworks Langkawi as well as losses on fair value changes recognised in the previous quarter.

YoY. Core PATAMI fell by -22% dragged by lower revenue (-22%) mainly driven by poorer topline performance from the water (-15%) and toll (-5%) segments.

Water segment. Revenue declined by -15% (ex. impact of MFRS15) largely driven by expiration of Taliworks Langkawi (31-Oct-20) compounded by lower metered sales and electricity rebates for its SSP1 operations. Stripping away Langkawi, metered sales at SSP1 declined by -2.3% as average MLD was marginally lower by -1.3% during the quarter.

Tolls. Revenue declined by -5% as the company’s Cheras-Kajang highway ADT contracted by roughly 8-9% YoY following the imposition of MCO2.0 on 13 Jan-21. We noticed that the strict lockdown which were imposed on 18 March-20 and its impact on 1QFY20’s ADT was less severe than MCO2.0 as it only captured 2 weeks of lockdown. Imposition of MCO2.0 early in 1QFY21 coupled with proliferation of WFH practices this time around could have also contributed to the ADT decline.

Construction. Progress billings picked up YoY with revenue more than doubling as construction work is allowed during MCO2.0 as opposed to MCO1.0 when there was a complete cessation. Nonetheless, the segment registered wider losses (4x) having written off retention sum and downward margin revision. We view Taliworks as a natural candidate to secure work from various WTP contracts in the pipeline.

Forecast. Tweak FY22 earnings higher by 2.3% after adjusting minority interests and introduce FY23 earnings of RM62m.

Maintain BUY, TP: RM0.99. Maintain BUY with same SOP-driven TP of RM0.99. Taliworks’s defensive source of earnings supports the stock’s healthy sustainable yields of 7.9% for FY21-22.

Source: Hong Leong Investment Bank Research - 20 May 2021