• Keep BUY, SOP-derived TP drops to MYR1.01 from MYR1.06, 22% upside with 8% FY24F yield. Taliworks Corporation’s 1Q23 core profit is below estimates, at just 14% of our and Street full-year projections. The negative deviation was partly due to higher-than-expected costs and the slow progress of its Sungai Rasau projects. A first interim dividend of 1.65 sen per share was declared in 1Q23. We still favour this company, due to its defensive earnings base, attractive c.8% FY24F yield and cheap market valuation of 10.3x FY24 EV/EBITDA (-2SD below the 5-year mean).

• 1Q23 core earnings totalled MYR10m (-2% YoY). This was due to to the lower volume of metered sales for TWK’s water division, at 89.9m cu m (1Q22: 88.1m cu m) for Sungai Selangor Water Treatment Plant Phase 1 operations. Meanwhile, its construction arm saw a >100% YoY jump in EBIT, backed by better YoY progress for the Sungai Rasau projects, Nevertheless, management highlighted that the Sungai Rasau projects are in the midst of securing requisite approvals from the authorities, which explains its sluggish progress at present. We estimate progress to be 4-6% as at end-1Q23 (end-FY22: 2%) vs an initial 17% targeted completion in FY22.

• 1Q23 average daily traffic (ADT) for the Grand Saga (51%-owned) and Grand Sepadu (37.5%-owned) highways grew by 11% YoY and 6% YoY. ADT growth in the Grand Saga highway was due to the opening of Sungai Besi Ulu-Kelang Elevated Expressway (SUKE), which led to a 3% YoY EBIT growth for the toll business in 1Q23. The renewable energy (RE) segment, meanwhile, registered sales of MYR6.4m in 1Q23 (4Q22: MYR5.6m) – reflecting stronger numbers post-solar panel replacement at the SaTerm solar facility.

• We cut FY23-25F earnings by 13%, 8% and 1% after: i) Factoring in a more conservative timeline for the completion of the Sungai Rasau projects; and ii) higher loss estimates for its waste management associate (amid continuing deduction of dividends on preference shares in the absence of a tariff revision). After adjusting our projections and rolling over the valuation base year to FY24 from FY23, our SOP-based TP drops to MYR1.01. Our TP also includes a 0% ESG premium, in line with our in-house proprietary methodology. Our ESG score of 3.0 remains put despite the weightage change of the E, S and G pillars (see last paragraph for more details). Long- term catalysts include a potential involvement in phase 2 of the Sungai Rasau Water Supply Scheme - expected in 2025-2026, in our view.

• Key risks include a slower-than-expected economic recovery and negative effects of any changes in government policies.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 23 May 2023