• Taliworks’ core operations were relatively resilient despite the adverse impact of the Movement Control Order (MCO) on its businesses.
• Net profit fell 26% qoq to RM11.7m in 2Q20, mainly due to the RM6m one-off provision of termination benefits for its Langkawi water-supply operation. Core earnings were up 7% qoq in 2Q20.
• Potential upside if Langkawi concession is extended. Reaffirming our BUY call and target price of RM0.96, based on a 20% discount to RNAV.

Below Expectations

Taliworks’ 6M20 results were below market and our expectations. The company reported net profit of RM27.6m (+23% yoy) in 6M20, comprising only 37-39% of market consensus and our previous full-year forecasts of RM70.7m and RM74.8m, respectively. We were surprised by the RM6m provision of termination benefits for staff attached to its Langkawi water-supply operation as the concession ends on 31 October 2020. Core earnings of RM32.7m (+48% yoy) in 6M20 were within our expectations (44% of our previous full-year forecast) assuming a better 2H20 result.

Lower Traffic Volume and Water-tariff Rates

Revenue fell 10% yoy in 6M20 on lower traffic volume for its toll highways due to the MCO, lower water-supply volume especially for its Langkawi operations (reduction in tourism activities due to the pandemic) and the reduction of bulk-water supply rates to RM0.41/m³ from RM0.46/m³ for its Sungai Selangor Water Treatment Plant Phase 1 (SSP1) under the new agreement with Air Selangor. Net profit jumped 48% yoy to RM27.6m in 6M20 due to higher returns on cash, the absence of Tenaga’s late-penalty charges (incurred in 6M19), lower toll-highway amortisation, a lower share of associate losses and lower overhead (including rental rebates for office premises).

Mixed Earnings Revisions, But Remains a Top Sector Pick

We cut our 2020E net profit by 7% to RM69.6m to reflect the net exceptional loss in 6M20, but maintain our 2020-22E core net profit. Taliworks kept its net DPS of 1.65 sen per quarter in 2Q20 (ex-date: 7 September 2020) despite lower qoq earnings. We look for better 2H20 earnings as toll-highway traffic volume recovers with the lifting of travel restrictions. We continue to like Taliworks for its relatively resilient operations and net cash position and see potential earnings upside if its Langkawi water-supply concession is granted an extension of concession period. We reiterate our BUY call and 12-month TP of RM0.96, based on 20% RNAV discount. We view the 2020-22E net yield of 7.8% as attractive. Downside risk: adverse government policy change for toll-road concession.

Source: Affin Hwang Research - 21 Aug 2020