• Taliworks’ 2020 results were within expectations. Core earnings jumped 33% yoy to RM66m in 2020 driven by its core water supply and toll highway projects despite the disruptions caused by the pandemic
• We cut core EPS by 7% in 2021E to reflect a delay in completing the solar assets acquisition deal to June 2021. But we lift core EPS by 3% in 2022E assuming lower level of minority interests as seen in the 2020 results
• The diversification into the renewable energy business will provide a new growth area for Taliworks. Attractive net yield of 8% is sustainable. We reiterate our BUY call and TP of RM0.96, based on 20% discount to RNAV

Operational Disruption

Core net profit of RM66.2m (+33% yoy) in 2020 were in line with consensus and our forecasts of RM62.5-66.1m. Revenue fell 16% yoy to RM318m in 2020 with all divisions registering lower revenue: water supply (-12% yoy), construction (-63% yoy) and toll highway (-17% yoy). The disruptions caused by the pandemic and Movement Control Order led to lower metered supply of water and lower traffic volumes for its toll highways. There were one-off items such as the RM6.5m cost of termination benefits and another RM1.6m cost to restore the water treatment plant for its Langkawi concession. The net exceptional loss of RM6.7m contributed to the 22% yoy decline in headline net profit to RM59.5m in 2020. Core earnings remained stable qoq at RM17.2m in 4Q20.

Win Some, Lose Some

The expiry of the Langkawi water supply concession on 31 October 2020 also reduced the revenue contribution for 2 months in 2020 and the future. But we believe the proposed acquisition of 4 solar assets for RM180m will replace the loss of earnings and cash flow contribution from the Langkawi concession. But the delay in completing the deal led us to cut our core EPS by 7% in 2021E assuming the deal is completed on 31 June 2021 instead of 31 December 2020.

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. Its net cash position of RM116m will likely turn into a net debt position post-acquisition but net gearing will remain low. With an attractive net yield of 8% 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 policies and slow economic recovery.

Source: Affin Hwang Research - 1 Mar 2021