• Keep BUY and MYR1.01 TP, 16% upside with c.7% yield. FY23 core earnings of MYR42m (-22% YoY) missed estimates, at 88% and 84% of our and Street’s full-year projections. The negative deviation was mainly due to the absence of toll compensation for the Grand Saga highway. A fourth interim dividend of 1 sen/share was declared in 4Q23, bringing FY23 dividends to 5.95 sen/ share. We favour Taliworks for its undemanding valuation (-2SD below the 5-year EV/EBITDA mean) and attractive c.7% FY24F yield.

• 4Q23 core earnings stood at MYR6.6m (-21.8% YoY), with toll highways accounting for the bulk of the shortfall, amidst the recognition of toll compensation in 4Q22 for the Grand Saga highway. This offset the impact from the 4% YoY and 3.5% YoY growth in average daily traffic in 4Q23 for the Grand Saga and Grand Sepadu highways. Likewise, the water treatment and supply division saw its revenue and EBIT fall 2% YoY and 3% YoY in 4Q23 due to lower metered sales of MYR37m (4Q22: MYR37.5m) after reaching 88.1m cu m in 4Q23 (4Q22: 91.5m cu m) for the Sungai Selangor Water Treatment Plant Phase 1 operations.

• The construction segment saw >100% YoY EBIT jump in 4Q23 amid better progress of the two Sungai Rasau Water Treatment Plant packages. As at end 4Q23, Package 2 and 3 had completion rates of c.10% and c.4% vs the c.2% average completion rate at end 4Q22. The renewable energy segment’s 4Q23 EBIT decline of 53% YoY– despite the 3% YoY energy output growth – came from one of its solar plants being billed at a rate lower than the feed-in tariff rate, after it exceeded the declared annual availability (DAA). Moving forward, solar panel replacements will be done for another two solar plants by Jul 2024, bringing energy efficiency levels close to 100% of DAA.

• No changes to FY24-25 earnings forecasts as our estimates have taken into account the progress billings of the Sungai Rasau projects, which are expected to hit cumulative completion rates of c.50% by end FY24, and c.80% by end FY25. We expect the Sungai Rasau project to be completed in FY26. Therefore, we introduce our FY26 earnings estimates, which take into account the balance works of the Sungai Rasau packages. All in, our SOP- derived TP remains at MYR1.01 after factoring in a 0% ESG premium/discount based on TWK’s ESG score of 3.0.

• Under Budget 2024, MYR1.1bn was allocated for supply issues, especially in Kelantan, Sabah, and Labuan. This may include infrastructure like water treatment plants which Taliworks is currently constructing. Another rerating catalyst would be quicker-than-expected approvals for the tariff hike for its waste management associate.

• Key risks include slower-than-expected economic recovery and changes in government policies.

Source: RHB Research - 28 Feb 2024