Taliworks’ 1Q19 result was below expectations. Net profit increased 53% yoy to RM11.7m in 1Q19, mainly due to lower expected credit loss (ECL) allowance resulting in higher net revenue. It is positive that Taliworks has signed new agreements with Pengurusan Air Selangor to continue with the operation and maintenance (O&M) of Sungai Selangor Water Supply Scheme Phase 1 (SSP1) on 24 May 2019. But we cut our core 2019E EPS forecast by 6% and DPS by 1.2 sen to 6 sen in 2019E due to the delay in signing the agreements. We reiterate our BUY call with reduced target price (TP) of RM1.14, based on 10% discount to RNAV.

Below Expectations

Net profit of RM11.7m (+53% yoy) in 1Q19 comprised 18% of market consensus 2019E forecast of RM64.5m and 16% of our previous estimate of RM74.3m. We were surprised by the lower-than-expected revenue and higher operating costs. Nevertheless, revenue grew 9% yoy to RM88.9m in 1Q19 due to lower ECL allowance at 10% of revenue instead of 25% previously. The slower increase in cost (+4% yoy) led to EBIT surging 23% yoy to RM24.9m. Core net profit grew 17% yoy to RM10.9m and reversed from a loss of RM11.5m in 4Q18 with the better operating performance for all divisions.

Delay in Finalising Agreement

Taliworks signed a new Bulk Supply Water Agreement (BSWA) and Termination and Settlement Agreement (TSA) with Air Selangor on 24 May 2019. But the condition precedents for the agreements will likely be met by August. Taliworks will continue to make ECL allowance to reflect the 10% haircut on receivables owed by Air Selangor. The repayment of the receivables will only start in 3Q19. We cut our core EPS forecasts by 6% to reflect higher operating costs and the continuation of ECL allowance until the new agreements take effect.

Higher Repayment Expected

At the analyst briefing, Taliworks explained that the receivables will continue to increase until the TSA takes effect. We assume that the outstanding receivables of RM750m at end-1Q19 will increase to RM850m and lift our core EPS by 2-3% in 2020-21E to reflect higher interest income (5.25% rate) on the receivables. But the delay in repayment of the receivables led us to cut our DPS forecast by 1.2 sen to 6 sen in 2019E. Net yield of 7-8% in 2019-21E is attractive. Maintain BUY.

Source: Affin Hwang Research - 29 May 2019