Higher Contribution from Renewable Segment, Better Operating Environment Ahead for Taliworks: RHB IB

RHB Research estimates Taliworks’ 3Q22 earnings to be 4-9% Quarter-on-Quarter (QoQ) higher backed by higher contribution from the renewable segment in addition to the core segments – toll, and water treatment and distribution. Panel replacement completion for Taliworks’ SaTerm solar asset by early November could lead to a better performance ratio of 80% (from 70%). All in, dividend payment is believed to remain intact amidst its defensive recurring earnings base, stable growth outlook, and attractive FY22F yield.

Expecting higher metered sales. It is expected that metered sales volume at the Sungai Selangor Water Treatment Plant Phase 1 (SSP1) to increase by 5- 6% YoY to reach 91-91.5m cu m in 3Q22 (3Q21: 86.7m cu m). This is attributable to the higher water consumption post-endemic. In fact, metered sales volume has been exhibiting YoY and QoQ increases over the past four quarters (from 3Q21 to 2Q22).

Better average daily traffic (ADT) for Grand Saga Highway, which has reverted to pre-pandemic levels of 148k in 2Q22, and is likely to reach 149-150k vehicles in 3Q22 (3Q21: 85k). Although Grand Sepadu’s ADT in 2Q22 of 88.5k vehicles is below the pre-pandemic level of 90k-93k vehicles, its revenue is projected to improve amidst better traffic mix from commercial vehicles under Classes 2 and 3, which entail higher toll rates.

Construction segment updates. The progress of construction works for the Sungai Rasau water treatment plant (WTP) stood at c.2.5-3.0% as at end 3Q22 compared to slightly above 2% as at end 2Q22. The slow progress was attributable to the variation orders in terms of design by the authorities. Nevertheless, the division is expected to continue recording operating profit in 3Q22 vs the operating loss of MYR480k in 3Q21 as the construction orderbook was minimal prior to the massive replenishment in Dec 2021 for the Sungai Rasau WTP worth MYR896m in total. Recall that the construction segment recorded an operating profit of MYR673k in 2Q22 (2Q21: operating loss of MYR379k).

Earnings and valuation. RHB Research has made the assumption of a 5% completion rate (from 15%) for the Sungai Rasau WTP in FY22F and do not discount the possibility of a delay beyond the initial contract timeline of 31 Dec 2024. Dividends on preference shares of its 35%-owned SWM Environment (its waste management business) are also likely to persist – capping the share of its associate’s profitability in the absence of a tariff revision.

As a result, the research house revises its FY22F-24F earnings by -7%, -4% and -2%. Its target price (TP) is revised to MYR1.08, after factoring in a 0% ESG premium/discount based on its in-house proprietary ESG methodology. Taliworks currently trades at 11x FY23F EV/EBITDA, about -0.5SD from its 5-year average rolling forward mean – which is attractive valuation considering the dividend yield of c.7%.

Key risks include unfavourable outcome on tariff revisions; restrictive cash flow from its associates and JVs,
given the step-up repayment of bonds/sukuk; deteriorating asset quality, giving rise to higher operating costs; a broad-based economic slowdown; and escalating waste management costs, dragging the company into loses.

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