• Keep BUY and SOP-based MYR0.98 TP, 28% upside and c.5% FY25F yield. Taliworks Corporation’s 9M24 core profit of MYR46.4m (+45% YoY) made up 70% of our full-year projection, which we deem as in line with expectations amid better construction progress for the Sungai Rasau Water Treatment Plant (WTP) project and traffic volume for its highways in 4Q24. We favour TWK for its undemanding valuation (more than -2SD from its 5- year mean EV/EBITDA) and attractive dividend yield.

• Core earnings in 3Q24 was up 16% YoY as the water treatment and supply division which recorded a 21% YoY increase in EBIT for 3Q24 was caused by the increase Bulk Water Supply Rate to MYR0.48/cu m from MYR0.42/cu m effective 1 Jan 2024. Toll highways remained strong in 3Q24 with the Grand Saga and Grand Sepadu highways seeing a 3.1% YoY and 1.8% YoY growth in average daily traffic, coupled with the toll compensation received from the Government which amounted to MYR55.4m (for Grand Saga) and MYR38.7m (for Grand Sepadu). This led to a >100% YoY EBIT growth for the toll division. Losses from its waste management associate meanwhile widened to MYR9.2m in 3Q24 (3Q23 loss: MYR5.1m) due to higher provision for loss of allowance of receivables which offset smaller payroll-related costs.

• The construction arm saw higher levels of revenue recognition in 3Q24 from the progress of Package 2 and 3 of the Sungai Rasau WTP project at MYR21.3m (3Q23: MYR14.2m) – which stood at 17% and 8% as of end 3Q24 vs 15% and 7% as of end 2Q24. However, EBIT was down 44% amid the completion of the Langat 2 Package 7 Balancing Reservoir job a year ago. Separately, the renewable energy segment saw an operating loss of MYR10.5m in 3Q24 (3Q23 EBIT: MYR2.2m) due to higher rehabilitation and maintenance expenses related to the solar panel replacements and the write- off of property, plant and equipment for the division.

• No changes to our earnings estimate as TWK’s results are deemed to be within expectations. Therefore, our MYR0.98 TP, which also factors in a 0% ESG premium/discount based on an ESG score of 3.0, remains unchanged.

• One of Air Selangor’s strategic measures include the development of four new water treatment plants in Selangor by 2030 to raise the water reserve margin which stood at 18% as of Sep 2024 vs 15% in 2023. This could spell opportunities for TWG which is currently constructing the Sungai Rasau WTP project. As such, any new jobs wins for its construction arm could serve as a re-rating factor for the stock as the last job the group won was in Dec 2021. Another rerating catalyst would be a quicker-than-expected approval of the tariff hike for its waste management associate.

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

Source: RHB Securities Research - 26 Nov 2024