Taliworks Corp Bhd
(Feb 17, RM1.53)
Maintain add with a higher target price (TP) of RM1.73: After stripping out the RM65.8 million gain on the disposal of the China waste management operations, Taliworks Corp Bhd’s financial year 2016 (FY16) core net profit was 8% above our full-year forecast and 6% above consensus.

The main deviation arose from the fourth quarter of FY16’s (4QFY16) write-down of deferred tax liability in relation to the change in the amortisation method for highway assets. Operationally, earnings were driven by its toll operations (higher traffic volume and toll compensation). Total full-year dividend per share of eight sen was in line (5.2% yield).

The higher recurring provisions for deferred payment consideration relating to the outstanding payment from SPLASH to Taliworks’s Sungai Selangor Phase 1 (SSP1), coupled with higher operating cost, impacted the group’s overall water earnings.

This was mitigated by strong construction earnings (despite a depleting order book) due to the revision in project margins and lower overheads. Tolled highways (subsidiary — Cheras-Kajang) surged 36% year-on-year and constituted 47% of operating profit.

A key highlight from the briefing was management’s renewed optimism about the outstanding water deals as the independent valuation on SPLASH, the last targeted water asset, has been completed.

Water receivables related to its 100%-owned SSP1 stood at RM502 million (up 7% quarter-on-quarter, 52 sen per share) — classified as a trade receivable owed by SPLASH and is likely to be recovered once the SPLASH acquisition issue is resolved, optimistically by mid-2017. The possibility of higher dividends remains intact.

Management clarified that prospects of enhancing its war chest via the recovery of receivables could revive the merger and acquisition (M&A) story in the second half of 2017. Given that the acquisition of SILK Highway is now off the table, the group is currently exploring potential overseas renewable energy type assets.

Details remain scant at this juncture, but the indicative size of the potential M&A is largely within reach, supported by the proceeds from its China divestments, of which about US$30 million remains denominated in US dollars.

In view of the expiry of Taliworks Langkawi’s concession in October 2020, the group is proposing an extension to the concession agreement. We believe that the likelihood of an extension remains supported by Taliworks’s strong operational track record.

We retain our FY17 to FY18 earnings per share forecasts and introduce FY19 numbers. Our fully diluted revised net asset value (RNAV)-based TP is raised slightly as we update for balance sheet items, still based on a 10% RNAV discount. Add retained, supported by a sustainable 5.3% yield. Medium-term catalysts include the resolution to the water deal and new M&A prospects. — CIMB Research, Feb 17