• Keep BUY and MYR0.98 TP, 24% upside and c.5% FY25F yield. 1H24 core profit of MYR32m (+46% YoY) made up 48% and 46% our and Street full-year projections which we deem as in line amid better construction progress for the Sungai Rasau Water Treatment Plant project and traffic volume of its highways in 2H24. 1H24 DPS stands at 2 sen vs our FY24 assumption of 4 sen. We favour Taliworks Corporation for its undemanding valuation (-2SD from its 5-year mean EV/EBITDA) and attractive FY25F dividend yield.

• Core earnings in 2Q24 was up 44% YoY despite the water treatment and supply division recording a 2% YoY decline in EBIT for 2Q24 – caused by the increase Bulk Water Supply Rate to MYR0.48/cu m from MYR0.42 effective from 1 Jan, which was offset by higher rehabilitation and maintenance expenditure. Nonetheless, 1H24 EBIT for the said division was up 9% YoY. Toll highway division remained strong in 2Q24 with the Grand Saga and Grand Sepadu highways seeing a 4.8% YoY and 1.6% YoY growth in average daily traffic which led to a 20% YoY EBIT growth for the division. Losses from its waste management associate also narrowed to MYR1m in 2Q24 (2Q23 loss: MYR5m) due to a lower provision for the loss of allowance of receivables and smaller payroll-related costs.

• The construction division saw a higher level of recognition in 2Q24 at MYR19.3m (2Q23: MYR7.2m). This is attributable to the progress of Packages 2 and 3 of the Sungai Rasau Water Treatment Plant of 15% and 7% as of end 2Q24 vs 11% and 6% in 1Q24. Such progress is deemed commendable, leading to a >100% YoY EBIT growth in 2Q24 for the division. Separately, the renewable energy division’s EBIT dropped 21% YoY in 2Q24 partly due to lower insurance claims compared to 2Q23. Moving ahead, the completion of solar panel replacements in July would enable energy efficiency levels to be close to 100% of declared annual availability.

• No changes to our earnings estimates as results are deemed within expectations. Therefore, our SOP-derived TP of MYR0.98 remains unchanged. Our TP also factors in a 0% ESG premium/discount based on an ESG score of 3.0, which is on par with the country median.

• Under Budget 2024, MYR1.1bn was allocated for supply issues, especially in Kelantan, Sabah and Labuan. Such solutions may relate to infrastructure like water treatment plants which TWK is currently constructing. Henceforth, any new job wins for its construction division could serve as a rerating factor for the stock as the last job win was in Dec 2021. 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 - 27 Aug 2024