Taliworks continues to be one of our market and construction sector top BUYs. We believe high dividend yield stocks like Taliworks (net yield of 8%) with strong recurrent cash flows from infrastructure concessions will outperform in the current low interest rate and volatile market conditions. Possible extension of its Langkawi concession should also improve its cash flows and RNAV. We maintain our TP of RM0.96, based on a 20% discount to its RNAV. Potential total return of 21% is attractive.

Highest Dividend Yield in Our Coverage

Taliworks has the highest dividend yield in our universe of stocks currently. Net DPS of RM0.066/share in 2020-2022E, giving attractive net yield of 7.9%, is sustainable given its strong cash balance of RM536m or RM0.27/share as at 31 March 2020. The group’s RM391m debts are mostly non-recourse project financing for its Grand Saga toll highway concessions. Its water supply and toll highway concessions generate recurrent earnings and cash flows to support its high dividend payout. We forecast its core operations to generate average FCF of RM92m or RM0.045/share p.a. in 2020-22E.

Possible Extension of Langkawi Concessions

Its Langkawi water supply concession expires in October 2020. Previous negotiations to extend the concession faced stumbling blocks. With the change in the Kedah state government in mid-May this year, Taliworks is seeking to restart negotiations to extend the concession. There is a possibility for the concession to be extended for an interim period of 9-18 months. This is to facilitate negotiations of a new concession agreement and avoid a disruption of water supply to consumers in Langkawi. We estimate a 12-month extension of the Langkawi concession on the same terms will lift RNAV/share of RM1.20 by 1% or RM0.01/share and core EPS by 11% in 2020E and 44% in 2021E.

Investment Opportunities

The Covid-19 pandemic has adversely impacted the corporate sector, leading to some companies looking to dispose water supply, renewable energy and toll highway concession assets. Taliworks is in a strong financial position to explore these opportunities to drive long-term earnings growth.

Safe Haven Amidst Market Volatility

We understand that Taliworks is looking to strike a balance between investing for long-term growth while maintaining a high dividend payout (at least 6.6 sen p.a.) to reward shareholders. We reiterate our BUY call with an unchanged target price of RM0.96, based on 20% discount to RNAV.

Source: Affin Hwang Research - 22 Jun 2020