CIMB Research upgrades Taliworks to add, TP RM1.40

One of Taliworks

KUALA LUMPUR: CIMB Equities Research has upgraded Taliworks Corporation to an add with a higher target price of RM1.40 compared with 91 sen previously.

It said on Tuesday, the 90% recovery in receivables, though largely staggered over nine years, eliminates overhang on the stock. 

“It solidifies the new operations and maintenance (O&M) contract over the longer term, while the improved cashflow for Sungai Harmoni increases the odds of higher dividends (on top of the sustainable eight sen per annum 6.5% yield), in our view. 

“We narrow RNAV discount to 10% (40% previously) which raises TP to RM1.40. Upgrade from Hold to Add in view of the diminishing receivables risk and improved earnings prospects from new O&M terms,” it said.

CIMB Research said Taliworks 1HFY18 core net profit was in line at 47% of its and 50% of consensus full-year estimates.

It deems this broadly in line as it expects a stronger 2H18F on the back of diminishing provisions on receivables and higher bulk supply rates (BSR) for Langkawi and Selangor water operations as per the existing O&M contract. 

The absence of provisions in 2Q18 (1Q18: RM9.9mil) in relation to the recovery of unpaid receivables of Sungai Harmoni almost doubled 1H18 reported net profit (core net profit: down 6%).

As for the O&M deal, Taliworks’ management considers the new terms to be overall positive. 

The five sen/m3 reduction/step-down in the BSR is compensated by a seven-year extension of the O&M tenure, which will now expire in 2036. 

Over the extension period, 100%-owned Sungai Harmoni’s BSR (53 sen /m3) will be 20% higher than the base case of 44 sen /m3. 

“During the results briefing, management guided for a +RM86mil net impact on FY18F net profit. The RM72.3mil bad debt write-off in relation to the 10% haircut to RM723mil accumulated receivables and the resultant tax effect would be offset by a RM186mil writebackof accumulated provision on receivables. 

Assuming that the write-back occurs as a one-off in 4Q18, the net impact would be a 112% boost to FY18F net profit, lifting it to RM163mil. 

“We estimate that the 10% upfront payment of receivables of RM65mil would increase end-2Q18 cash by 70% to RM157mil,” it said.