PETALING JAYA: Taliworks Corp Bhd is expected to have an additional 49% growth to earnings before interest, taxes, depreciation and amortisation (EBITDA), assuming that proceeds from repayment by Syarikat Pengeluar Air Selangor Sdn Bhd (Splash) is used for upcoming merger and acquisition (M&A) deals, said Hong Leong Investment Bank (HLIB).
With Splash set to be acquired by the Selangor government in the near term, this would allow full repayment of trade receivables amounting to an estimated RM471mil owed to Taliworks.
“The repayment of RM471mil will provide a strong boost to Taliworks’ cash pile.
“Taliworks provides investors exposure to the potential settlement of Selangor’s water restructuring and a potential huge cash pile which can increase earnings per share significantly via M&A,” said HLIB in an initiation report.
The research house added that Taliworks had indicated they would use the proceeds for acquisitions, targeting mature infrastructure assets in Malaysia and developed markets.
Taliworks is looking for assets in the water, waste management, toll road and renewable power plant sectors and the size of their preferred assets fall between RM500mil and RM1.5bil.
In addition, the group’s potential M&As would be on the back of its strong relationship with the Employees Provident Fund (EPF), as it is likely to continue the partnership for future ventures into acquisition of concession assets.
HLIB opined that Taliworks would enjoy lower capital cost by partnering EPF.
“The joint venture with EPF significantly enhances Taliworks’ war chest for M&A purpose and it can buy assets of up to RM2bil, on a 50:50 joint venture basis with EPF and 75:25 debt-to-equity ratio. “Assuming that Taliworks manages to achieve its 12% target equity internal rate of return (IRR), this will add about RM57mil to its expected FY16 core EBITDA, which represents about 49% growth,” said HLIB.
The partnership with EPF began during Taliworks internal business restructuring in 2014, which resulted in EPF acquiring 49% interest in the Cheras-Kajang Highway.
Subsequently, EPF acquired 37.5% interest in Grand Sepadu Highway from Taliworks and 35% interest in garbage collection and disposal services company SWM Environment Holdings Sdn Bhd (SWME) from Taliworks’ parent company, LGB Group.
As for Taliworks’ concession agreement for the Cheras-Kajang Highway, the concession is expected to enjoy 25%-45% toll hike every five years, with the next hike scheduled in 2020.
Taliworks’ newly acquired SWME is expected to grow by double digit, in percentage terms, over the next several years.
This is due to improvements in operating efficiency through the reduction of operating costs and tariff hike.
The next tariff hike of about 25% is scheduled to be implemented in 2019.