• We view positively Taliworks’ proposed acquisition of 4 brownfield solar projects with an aggregate capacity of 19 MWp from TerraForm Global and SEV for RM180.4m and expect it to be earnings accretive and generate positive FCF.
• We upgrade 2021-22E core EPS by 32-34% assuming the proposed acquisition will complete by end-2020. The proposed acquisition is timely and will partly offset the impact of the expiry of its Langkawi water supply concession.
• We reiterate our BUY call and TP of RM0.96, based on 20% discount to RNAV. Our RNAV is unchanged as we assume the acquisition is at fair value.

Acquisition of solar assets with long-term supply agreements

Taliworks has proposed to acquire the majority economic interest in 4 brownfield solar projects from TerraForm Global (effective 85% stake) for an aggregate transaction sum of RM144.1m. A drag agreement signed between TerraForm Global and Sun Energy Ventures (SEV) allows Taliworks to discuss with SEV the acquisition of the remaining 15% stake in the solar assets for RM36.3m. We view the proposed acquisition positively as it provides a platform for Taliworks to diversify into the fast-growing renewable energy sector, by acquiring brownfield assets with stable recurring cash flow and long-term “takeor-pay” agreements (14 remaining years to expire in 2034) to supply power to established government-linked companies Tenaga and Malaysia Airports Holdings (MAHB).

Fair acquisition price

We believe the proposed total acquisition price of RM180.4m for a 100% stake is fair, close to our estimated DCF value of RM181.2m using WACC of 7%. Taliworks will also acquire the solar operations and maintenance (O&M) company under the deal and gain the expertise to bid for new solar projects. Although these assets incurred an aggregate net loss of RM11.1m in 2019, we understand there was a one-off impairment loss on receivables due from its holding company as part of the internal restructuring and interest payment on shareholders’ loan (taken over by Taliworks under the proposed acquisition). We forecast net profit of RM21m p.a. in 2021-22E for the solar assets. Hence, we believe acquisition 2021E PER of 8.6x is attractive compared to Malaysian listed solar companies’ (contractors and concessionaires) peer average of 22.4x.

New area of growth

FCF generation remains strong for its core operations of water supply and toll highway concessions. Its diversification into renewable energy will provide a new area of growth. With an attractive net yield of 8.1% p.a., we reiterate our BUY call and 12-month TP of RM0.96, based on a 20% discount to RNAV. Key risk: change in government and policies.

Source: Affin Hwang Research - 15 Dec 2020