This article first appeared in The Edge Financial Daily on December 31, 2019
Taliworks Corp Bhd
(Dec 30, 90 sen)
Maintain buy with a higher target price of RM1.18: The RM665 million disposal price for receivables due from Pengurusan Air Selangor Sdn Bhd (Air Selangor) was higher than our discounted cash flow (DCF) valuation of RM638 million assumed in our previous revised net asset value (RNAV)/share estimate of RM1.24 for Taliworks Corp Bhd.
We gather that the realised value was based on a low discount rate of 3.8% (similar to the yield on Cagamas bonds) compared with our assumption of 5% to derive our DCF valuation. We raise our RNAV/share estimate to RM1.30 to reflect the higher realised value of the receivables.
We reduce our interest income forecasts on expectations of lower returns on cash proceeds from the disposal of receivables (2.7% per annum (pa) compared with the 5.25% pa interest rate on outstanding receivables agreed by Air Selangor. As a result, we cut our core earnings per share by 12% in 2020 and 2021.
We expect Taliworks to increase its dividend payout to 1.8 sen for the fourth quarter ending Dec 31, 2019 (4QFY19) from 1.2 sen for 3QFY19, given its improved financial position, following the successful securitisation of the receivables to raise RM665 million in cash. From a net debt of RM299 million in 3QFY19, we estimate Taliworks has turned to a net cash position of RM366 million or 18 sen per share.
Taliworks has securitised the receivables as planned. We believe the potential catalyst for an upward rerating of the stock is an increase in its dividend per share (DPS) by 30% to 50% indicated by the management.
The management prefers to adopt a sustainable dividend payout rather than pay a one-off special dividend. Our DPS of 7.2 sen for 2020 assumes a 50% increase from the 2018 level, with an attractive 2020 net yield of 8.3%.
The key downside risk is when its dividend payout is not increased as expected.
Taliworks has been unsuccessful in the recent water-related project tenders due to stiff competition.
But there are opportunities to tender for projects to lay new pipes or replace old pipes to reduce non-revenue water in several states like Selangor. Taliworks is also exploring new investment opportunities in renewable energy — rooftop solar, off-grid power system and waste-to-energy projects. However, we believe there are no imminent investments expected, given the management’s decision not to participate in the large-scale solar phase 3 tenders.
Hence, we believe Taliworks will increase the dividend payout to a new sustainable level given its improved financial position and strong cash flow generation from its water and toll highway infrastructure concessions. — Affin Hwang Capital, Dec 30