• Keep BUY and SOP-derived MYR1.06 TP, 23% upside, c.8% FY22F yield. Taliworks’ FY22 core earnings of MYR53.7m (-32% YoY) met our estimates but missed Street’s, at 95% and 93% of full-year projections. A fourth interim dividend of 1.65 sen per share was declared in 4Q22, bringing the FY22 dividend to 6.6 sen per share. We favour the stock for its defensive earnings base, stable growth outlook, and attractive yield.

• Results review. 4Q22 core earnings stood at MYR20m (+52% YoY) with the bulk of revenue and operating profit backed by the water treatment, supply, and distribution business which saw its revenue rise 8.3% YoY. The growth came from higher metered sales of RM37.5m (4Q21: RM36.6m) after reaching 91.5m cu m in 4Q22 (4Q21: 89.3m cu m) for the Sungai Selangor Water Treatment Plant Phase 1 operations. This partly helped mitigate losses from its waste management associate due to higher deduction of dividends on cumulative preference shares.

• 4Q22 average daily traffic (ADT) for the Grand Saga (51% owned) and Grand Sepadu highways (37.5% owned) were 9% and 4% higher YoY. Grand Saga highway received a toll compensation of MYR11.3m from the Government (lower than the MYR43.5m received in 3Q21), in relation to the non-increase in scheduled toll hikes for FY20. The construction segment saw an over-recognition of revenue from the Sungai Rasau projects during earlier reporting periods, in addition to lower contribution from a project in the Cyberjaya Flagship Zone. The renewable energy segment registered 4Q22 revenue of MYR5.6m, reflecting full-year recognition of MYR17.2m.

• No changes to earnings forecasts as results were within expectations. As such, our SOP-derived TP remains at MYR1.06 after factoring in a 0% ESG premium/discount based on our proprietary ESG methodology. We may upgrade the ESG score once Taliworks successfully constructs the dewatering plant (estimated by CY24) to ensure proper treatment and disposal of by-products from the water treatment process.

• We introduce our FY25 earnings estimates, which take into account a toll rate hike for the Grand Sepadu highway, but assumes no new construction job replenishments. However, we do not rule out the possibility of Taliworks securing construction jobs related to phase 2 of the Sungai Rasau Water Supply Scheme, likely in CY25. Its solar assets may see stronger contribution after the panel replacement for the SaTerm solar asset in early Nov 2022, increasing the performance ratio to c.90% from 70% previously. Based on our estimates, yearly revenue from its solar assets could reach >MYR20m from FY23.

• Key risks include slower-than-expected economic recovery and changes in government policies.

Source: RHB Research - 17 Feb 2023