• Keep BUY with new MYR0.98 TP from MYR1.01, 20% upside, c.5% FY25F yield. Taliworks Corporation recorded a 1Q24 core profit of MYR15m (+49% YoY) but missed both ours and Street’s estimates – contributing 20% of full- year projections. The negative deviation was mainly due to the sluggish progress of construction projects. A first interim dividend of 1 sen per share was declared in 1Q24 vs our FY24 assumption of 4 sen per share payout. We favour Taliworks for its undemanding valuation (-2SD below its 5-year mean EV/EBITDA) and attractive c.5% FY24F yield.

• Core earnings grew 49% YoY in 1Q24 backed by the water treatment and supply division, which saw a 22% YoY growth in EBIT during the quarter due to the Bulk Water Supply Rate increasing to MYR0.48 per cu m from MYR0.42 per cu m from 1 January. Toll highways remained strong in 1Q24 with the Grand Saga and Grand Sepadu highways seeing 4.4% and 1.1% YoY growths in average daily traffic – leading to 14% YoY EBIT growth. The Grand Sepadu highway also received a toll compensation of c.MYR4m (effective share) in respect for non-increase in toll for 2022.

• The construction arm saw a slight 1% YoY drop in revenue for 1Q24, with the Package 2 and 3 of Sungai Rasau Water Treatment Plant having a completion rate (based on accounting progress) of 6% and 11% (as of end- 1Q24). Such progress is deemed slow as we previously expected a cumulative progress of c.30% by end-FY24 for both packages. Separately, the renewable energy segment’s EBIT rose 33% YoY in 1Q23 post solar panel replacement at its Satellite Terminal solar plant. Moving ahead, solar panel replacements will be done for another two solar plants by Jul 2024, which would enable energy efficiency levels to be close to 100% of declared annual availability.

• We cut our FY24 earnings estimates by 12% along with some margin adjustments but bump up our FY25-FY26 profit projections by 2-3% as we backload the recognition of the Sungai Rasau construction project stemming from sluggish approvals to proceed to work on land. Taliworks is currently seeking an extension beyond FY25, which we have already pencilled in our assumptions for the Sungai Rasau project to be completed in FY26 rather than FY25 while the company cited that it is eligible to receive a toll compensation for both its highways in respect for 2023. We also roll forward our valuation base year to FY25 from FY24 for our SOP components. As a result, we arrive at a new SOP-derived TP of MYR0.98 (previously MYR1.01) after factoring in a 0% ESG premium based on an ESG score of 3.

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

• Key risks include lower-than-expected traffic and water consumption.

Source: RHB Research - 15 May 2024