Taliworks’ 2019 results were below market and our expectations. Net profit fell 24% yoy to RM76m in 2019, mainly due to lower exceptional gains linked to the Sungai Selangor Water Supply Scheme Phase 1 (SSP1) project. Core net profit grew 37% yoy to RM50m, mainly due to a lower effective tax rate. Taliworks turned net cash after securitising SSP1 receivables. Quarterly DPS was raised from 1.2 sen to 1.65 sen, which was slightly below our 1.8 sen assumption. The stock boasts an attractive net yield of 7.9% in 2020E. We reiterate our BUY call with a TP of RM1.18, based on 10% discount to RNAV.

Below Expectations

Net profit of RM76m in 2019 was below consensus and our forecasts. We were surprised by the RM29.6m loss on disposal of receivables linked to the SSP1 project in 4Q19. The loss pushed Taliworks into the red, reporting a RM18.5m net loss in 4Q19. We are not concerned with the accounting loss as it does not affect Taliworks’ cash flow. The loss partly offset the gains recognised in earlier quarters arising from the modification of receivables due from SPLASH pursuant to the Termination and Settlement Agreement for SSP1, waivers granted by creditors and the waiver of late penalty charges on outstanding electricity bills. A net exceptional gain of RM26.8m in 2019 was lower than the RM64.5m in 2018, resulting in net profit falling 24% yoy to RM76.5m in 2019. However, core net profit jumped 37% yoy to RM49.7m in 2019 due to higher toll highway and water supply earnings and lower taxation.

Turned Net Cash

Taliworks securitised the SSP1 receivables to receive RM626.1m cash upfront with deferred purchase price of RM33.9m to be paid after offsetting expenses incurred by the special-purpose vehicle issuing Sukuk bonds for this purpose. It turned to net cash of RM190m or RM0.094/share at end-2019.

Higher DPS

Taliworks increased its quarterly net DPS to 1.65 sen in 4Q19, which was slightly below our expectation of 1.8 sen, but representing a 38% increase from 1.2 sen in 3Q19. We understand that 1.65 sen per quarter is the minimum payout going forward, given its improved financial position and strong operating cashflow. We cut our 2020-22E DPS to 6.6 sen from 7.2 sen. We lift our 2020E core EPS by 8% to reflect higher interest income. Taliworks is one of our top small-cap sector picks given its attractive net yield of 7.9% in 2020E. Taliworks plans to also accelerate the payment of dividends within 1 month of declaration. Maintain BUY.

Source: Affin Hwang Research - 28 Feb 2020