• Taliworks’ results were below our expectations due to the slow recovery in water supply earnings and provision for costs at the expiry of its Langkawi concession. We reduce core EPS by 12% in 2020E and 3% in 2021-2022E.
• Core net profit increased 1% qoq to RM17.1m in 3Q20, mainly driven by the recovery in toll highway revenue and earnings as the government’s Movement Control Order (MCO) was eased.
• FCF remains strong and Taliworks sustained its net DPS of 1.65 sen per quarter on track to generate net yield of 8.3%. BUY with RM0.96 target price.

Slow recovery

Taliworks 9M20 results were below market and our expectations. Net profit of RM43.8m (+54% yoy) in 9M20 comprises only 71% of market consensus full-year forecast of RM61.3m and 67% of our previous estimate of RM69.6m. We were surprised by the slow recovery in the water supply earnings and RM7.1m provision for costs at the expiry of its Langkawi concession. Revenue fell 11% yoy to RM303.4m in 9M20 as traffic volume on its toll highways and water supply consumption eased during the MCO period. Core net profit jumped 28% yoy to RM50.1m in 9M20 on lower share of losses from its waste management services and lower net interest expense.

Expiry of Langkawi water supply concession

Its Langkawi water supply concession ended on 31 October 2020 and hence we expect revenue and earnings to be lower in 4Q20 and onwards. The concession contributed RM45.4m or 19% of group revenue and RM8.3m or 14% of group PBT in 9M20. We have assumed the concession will expire in our earnings forecasts. However, operating profit margin of 34.7% in 9M20 was below our expectation. Hence, we cut our core EPS by 12% in 2020E and 3% in 2021-2022E to reflect higher operating expenses.

Strong cash flow generation

FCF generation remains strong for its core operations in 9M20. However, the reduction in water tariff rates under the new operation and maintenance agreement with Air Selangor, and lower water supply and traffic volume for its concessions led to estimated FCF declining 24% yoy to RM66m. Its cash position remains high at RM439m or RM0.22/share with mostly of long-term project financing debts. Hence, we believe it is able to sustain net DPS of 6.6 sen p.a. We believe the recent correction in the share price provides an opportunity to accumulate the stock, given attractive net yield of 8.3% p.a. We reiterate our BUY call with RM0.96 target price, based on 20% discount to RNAV.

Key risks

Downside risks: (i) weak traffic volume for its toll highways; (ii) weak water production due to raw water supply disruptions; and (iii) reduction in dividend payout.

Source: Affin Hwang Research - 17 Nov 2020