Taliworks finished FY22 with core PATAMI of RM55.1m (-29.8% YoY) meeting our but missed consensus expectations at 95%/93% of forecasts. DPS of 1.65 sen was in-line with expectations. Steady contribution from water, highway and solar segments should anchor performance going forward. Meanwhile, construction recognition is likely back loaded in FY23. Slash FY23-24 earnings by -19.8% and -13.9%. Maintain HOLD with lower TP of RM0.86. Taliworks’s dividend yield of 7.7% remains its key selling point.

Meets expectations. Taliworks reported 4QFY22 results with revenue of RM85.9m (- 5.9% QoQ, 18.5% YoY) and core PATAMI of RM21.0m (67.9% QoQ, 72.4% YoY). This brings FY22 core PATAMI to RM55.1m, falling by -29.8% YoY. Results met our but missed consensus expectations at 95%/93% of full year forecasts.

Dividends. DPS of 1.65 sen was declared for the quarter (ex-date: 2 Mar-23).

QoQ. Core PATAMI increased by 67.9% mainly due to higher contribution from its highways division as compensation was finally received in 4QFY22. This coupled with tax credit of RM2.1m (vs tax expense of -RM6.6m in 3QFY22) more than offset sequential declines seen at its water (higher maintenance & rehab costs), construction (reversal of Rasau project recognition) and solar (lower insolation) divisions.

YoY. Core PATAMI increased by 72.4% resulting from stronger performance from water, highways and solar divisions. We attribute this to the aforementioned highway compensation, contribution from solar assets and higher water metered sales & electricity rebates seen in 4QFY22.

YTD. Core PATAMI declined by -29.8% despite an increase in revenue (+11.7%) resulting from significantly higher share of losses from associate amounting to - RM23.0m (vs FY21 share of profit: RM8.3m) as well as lower toll compensation recognised in FY22 amounting to RM32.4m compared with RM43.7m in FY21. The big swing in its associate’s contribution is due to higher preference share distribution rates effective in 2022.

Water. Revenue came in higher by 9.4% helped by a 4.3% increase in metered sales from normalised economic activities as well as a 37.0% increase in electricity and chemical rebates. We continue to expect stable metered sales and higher electricity rebates to anchor the division’s performance going forward.

Tolls. ADT at the Grand Saga highway and Grand Sepadu increased by 33% and 17% respectively, benefitting from increased car usage in FY22. We believe highways saw traffic above pre-pandemic levels in 2HFY22.

Construction. Revenue contribution doubled in FY22 driven by recognition from its Rasau projects. Due to delay in approvals from relevant authorities for physical work commencement, recognition is only at 2-3%. As such, there was also a revenue reversal of -RM1.5m in 4QFY22 from previous over recognition. Seeing as approvals have not been granted, contribution is likely still sluggish in 1QFY23.

Forecast. Despite meeting our forecasts, we slash FY23-24 earnings forecasts by - 19.8% and -13.9% in light of slow construction progress.

Maintain HOLD, TP: RM0.86. Maintain HOLD with lower SOP-driven TP of RM0.86 (from RM0.91) post updating balance sheet items in our SOP calculation. Taliworks’s defensive source of earnings could anchor its dividend yield of 7.7%.

Source: Hong Leong Investment Bank Research - 17 Feb 2023