We came away from Taliworks’s 4QFY22 briefing with a neutral take on the company. There were largely no surprises, positive or negative. Looking ahead, we anticipate steady contribution from water, highway and solar segments anchoring performance going forward. Construction contribution could push earnings higher but recognition is likely back loaded in FY23. Management reaffirmed its 6.6 sen DPS guidance. Maintain forecasts. Maintain HOLD with unchanged TP of RM0.86. Taliworks’s dividend yield of 7.5% remains its key selling point.

We Attended Taliworks’s Briefing With the Following Takeaways:

Construction. Progress has been slow for its Rasau projects so far due to pending regulatory approvals. This has resulted in weaker than expected recognition in FY22 coming in at 2-3% of RM896.4m (total awarded sum) despite being awarded both packages in Dec-21. Nonetheless, things are expected to pick up in FY23 once approvals are obtained; management is guiding for 30-40% recognition in FY22 with PBT margin guidance between 5-8%. We are expecting recognition acceleration toward the back end of FY23. We believe the completion period could be extended given the delays. Taliworks will also more aggressively seek construction opportunities within the privatised space and flood mitigation projects.

Tolls. ADT for its Grand Saga highway has been robust, recovering to higher than pre-pandemic levels since 3QFY22 (FY22: +33% YoY). ADT for Dec-22 and Jan-23 was 157k and 154k respectively compared to 148k pre pandemic. The highway has benefitted from spill over traffic from the recently opened SUKE highway. Grand Sepadu meanwhile has normalised close to its pre pandemic levels at 86k (93k pre pandemic). Compared with toll compensation of RM11.3m and RM43.5m recognised in FY22 and FY21 for Grand Saga, compensation in FY23 is likely negligible before seeing a jump in FY24. All in all, we think the robust trend of ADT could sustain in FY23 judging by strong auto sales number over the past year.

Water. Its bread and butter water division continues to be main cash driver for the group. FY22 saw average MLD expanding by 4.3% to 996.7, levels similar to 2017-19 period. Going forward, volumes should sustain but water revenue could still climb higher on due to higher electricity rebates. Nevertheless, this would be bottom-line neutral on account of the pass through mechanism.

Renewables. On a QoQ basis, the 4QFY22 dip in segmental contribution was driven by lower insolation and delays in panel replacement. The segment contributed revenue of RM17.2m and an operating profit of RM8.1m in FY22 (recognition started in 2QFY22). FY23 will be the segment’s maiden full year contribution to the group. The ongoing panel replacement program should also help Taliworks’s solar assets eke out higher electricity output.

Waste. There are no indications that Taliworks waste management associate will stage a recovery in FY23, in our view. Recall that the share of associate contribution has swung from a profit of RM8.3m in 2021 to a loss of -RM23.0m in 2022. In part the big swing was due to step up in preference share distribution rate from 6% to 10%. This was exacerbated by a -21.1% decline in PAT to RM168.8m at the company level brought about by provision on receivables, minimum wage increase and Cukai Makmur (RM11m). The unit will require a tariff hike to positively contribute to Taliworks’s bottomline, in our view.

Dividends. Management foresees no issues in maintaining the 6.6 sen DPS going forward. In fact, optimising the capital structure in its renewables segment could raise additional RM120-130m in addition to its existing RM217m cash pile.

Forecast. No Change.

Maintain HOLD, TP: RM0.86. Maintain HOLD with unchanged SOP-driven TP of RM0.86. Our TP implies FY23f/24f P/E multiple of 25.1x/20.1x. Taliworks’s defensive source of earnings could anchor its dividend yield of 7.5%.

Source: Hong Leong Investment Bank Research - 20 Feb 2023