This article first appeared in The Edge Financial Daily on August 7, 2018
Taliworks Corp Bhd
(Aug 6, RM1.17)
Downgrade to hold with an unchanged target price (TP) of RM1.29: Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) was offered a RM2.55 billion takeover price by Pengurusan Air Selangor Sdn Bhd. This represents a 28% discount to net book value of SPLASH as of June 30, 2018, which stood at RM3.54 billion. This transaction will be structured with an upfront cash payment of RM1.9 billion, while the remaining RM650 million will be paid over nine years, with an accrued interest rate of 5.25% per annum.
We understand that negotiations regarding RM638 million receivables (as at the first quarter of 2018) owed by SPLASH to Taliworks Corp Bhd is undergoing at this juncture. Assuming a similar discount with the SPLASH deal (28%) and transaction structure (75% upfront cash payment; 25% instalment), Taliworks will receive an about RM382 million upfront receivable payment (32 sen per share) with the balance in instalment. Under this scenario, Taliworks is expected to write back a small amount of recovered receivables as the carrying value of receivables is about RM452 million.
Post finalisation of the SPLASH deal, we believe Taliworks will continue to run the operations and maintenance (O&M) operation of the SSP1 water treatment plant. This is because a tripartite agreement had been signed between the Selangor state government, SPLASH and Taliworks, and the agreement allows Taliworks to negotiate directly with the Selangor government should SPLASH no longer requires its services. However, we do not discount the possibility that there will be changes to the terms under the current agreement that will expire in 2030.
Assuming a special dividend of 32 sen per share being paid, the implied ex-special dividend share price would be 98 sen per share (versus the current share price of RM1.30). Moreover, Taliworks is expected to continue the dividend policy of eight sen per annum post SPLASH deal as the O&M operation is expected to be cash flow-positive. Hence, an eight sen per share dividend translates into an about 8.2% dividend yield.
We downgrade our call to “hold”, with an unchanged sum-of-parts-driven TP of RM1.29, as the strong share price performance over the past two months, or a gain of about 53%, has reflected the optimism about the finalisation of the SPLASH deal. Moreover, the discount on receivables recovered may be higher than expected and the magnitude of the special dividend may disappoint. — Hong Leong Investment Bank Research, Aug 6