• Keep BUY, new SOP-derived MYR1.12 TP from MYR1.03, 17% upside with c.7% FY22F yield. Taliworks’ 1Q22 core earnings of MYR10.3m missed our and Street estimates – accounting for just 12.7% and 13% of full-year projections. The variance was mainly due to the higher tax expense amid the expiry of the tax waiver period for the Grand Saga Highway on 31 Dec 2021. An interim DPS of 1.65 sen was declared, for the quarter. We like this company for its defensive earnings base, stable growth outlook, and attractive dividend yield.

• Results review. Despite 1Q22 core earnings being lower by 1.5% YoY, revenue and operating profit expanded by >10% YoY. The bulk of this growth was underpinned by the water treatment, supply and distribution business, where turnover and operating profit grew by 7% YoY and 8% YoY. The growth came from higher metered sales of RM36.9m (1Q21: RM35.8m) after reaching 89.9m cu m in 1Q22 (1Q21: 87.3m cu m) in the Sungai Selangor Water Treatment Plant Phase 1 operation.

• 1Q22 average daily traffic (ADT) for Grand Saga and Grand Sepadu Highway was higher by 18.7% YoY and 3.6% YoY, amid the relaxation of movement restrictions. However, the growth in operating profit for both toll highways during the quarter was capped by higher amortisation of intangible assets. The construction segment also exhibited some growth by recording a revenue of MYR7.7m (1Q21: MYR3.9m) in the quarter, contributed by a project at the Cyberjaya Flagship Zone and the Sungai Rasau Project.

• Post results, we trim FY22-24F earnings by 6%, 2% and 2% as we take into account the expiry of the tax waiver for the Grand Saga Highway. Looking ahead, its business units’ quarterly earnings should gradually improve – in light of the country’s transition into endemicity. We opine that the construction progress for the Sungai Rasau Water Treatment Plant and Water Supply Scheme Phase 1 under Packages 2 and 3 will continue picking up, with work intensity ramping up in FY23-24. Moreover, the contribution of its recently acquired solar assets should provide additional revenues of c. MYR25-30m pa.

• We roll forward our valuation base to FY23F. As a result, our TP rises to MYR1.12, after factoring in a 0% ESG premium based on our in-house proprietary ESG methodology. TWK is trading at 11x FY22F EV/EBITDA, about -0.5SD from its 5-year average rolling forward mean – which is attractive, in view of its dividend yield of 7%. Key downside risks include a slower-than-expected economic recovery and negative effects of any change in government policies.

Source: RHB Research - 27 May 2022