Taliworks’ 2Q19 result was below expectations mainly due to lower water supply earnings. Net profit fell 11% yoy to RM22.4m in 6M19, mainly given high operating costs especially at its water supply division. We gather that execution of Taliworks’ new operation and maintenance (O&M) agreement for Sungai Selangor Water Supply Scheme Phase 1 (SSP1) has been delayed by 1-2 months to September/October 2019. We cut our 2019-21E core EPS by 3-12% to reflect higher costs. We reiterate our BUY call with a lower TP of RM1.12, based on a 10% RNAV discount.

Below Expectations

Net profit of RM22.4m (-11% yoy) in 2Q19 comprised 32-36% of market consensus and our previous 2019E forecast of RM62.2m and RM69.5m respectively. We were surprised by the lower-than-expected revenue and higher operating costs. Nevertheless, revenue was flat at RM178m in 6M19. The increase in cost (+9% yoy) led to EBIT falling 17% yoy to RM50.3m. Core net profit fell 39% yoy to RM22m in 6M19.

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 September/October due to delays in obtaining the various government authorities’ approval. The repayment of the receivables will likely start in 4Q19. We cut our core EPS forecasts by 3-12% to reflect higher operating costs.

Reiterate BUY Rating With Lower TP of RM1.12

We remain positive on Taliworks’ prospects to secure new water-related infrastructure projects. There is also the possibility to extend the concession period for its Langkawi water supply concession, which expires in October 2019 (extension not assumed in our model). Yield of 7-8% in 2019-21E looks attractive. We trim our RNAV/share estimate to RM1.24 from RM1.26 previously. Based on the same 10% discount to RNAV, we lower our 12-month TP to RM1.12, from RM1.14 previously. We reiterate our BUY call. Downside risks: (1) further delays in executing the new O&M agreement; and (2) the dividend payout not increasing, as we expect it to.

Source: Affin Hwang Research - 28 Aug 2019