Taliworks has completed the agreement with Pengurusan Air Selangor to continue with the operation and maintenance (O&M) of the Sungai Selangor Water Supply Scheme Phase 1 (SSP1). We understand that Taliworks will receive about RM700m plus interest at 5.25% p.a. over 9 years as settlement of the receivables owed by Air Selangor. We expect Taliworks to increase its dividend payout given its improved FCF under the new agreements. We reiterate our BUY call with a 12-month TP of RM1.12, based on a 10% discount to RNAV. We highlight the attractive net yield of 6.5% in 2019E and 7.7% in 2020E.

Repayment of Receivables Over 9 Years…

We understand that the receivables owing from Air Selangor is about RM770-780m currently. After taking an agreed 10% haircut, about RM700m will be repaid with upfront payment of RM70m within 2 weeks and the balance plus interest (5.25% p.a. rate) are payable in 9 annual instalments.

…could be Securitised for Upfront Payment

Taliworks plans to securitise the 9 annual instalments with banks to get the DCF amount upfront in 4Q19. We estimate that Taliworks will receive about RM638-644m upfront (based on discount rate of 4.8-5.0%), by securitising the receivables repayment by Air Selangor. We estimate Taliworks will have net cash of RM322m or RM0.16/share (17% of market capitalisation) if it is successful in securitising the instalments; turning from a net debt position of RM389m (net gearing of 0.3x) as at 30 June 2019.

Cut EPS Forecasts for Lower Interest Income

We cut our core EPS forecasts marginally by 2-3% in 2020-21E to reflect lower interest income, given the lower receivables estimate of RM780m compared to our previous assumption of RM850m. Despite the cut in earnings, FCF should improve with Air Selangor agreement completed.

Higher Dividend Payout

We expect Taliworks to increase net DPS payout from 1.2 sen per quarter to 1.8 sen per quarter, starting in 3Q19. Net yield of 6.5% in 2019E and 7.7% in 2020E for Taliworks is attractive, compared to market consensus FBMEMAS net yield of 3.56% in 2019E and 3.49% in 2020E. With average FCF generation of about RM132m p.a. in 2019-2021E and estimated net cash position of RM322m, we believe Taliworks will be able to sustain projected dividend payout of RM145m (7.2 sen) p.a. BUY.

Source: Affin Hwang Research - 17 Sept 2019