RHB Research recommends Taliworks with 97 sen fair value

by DASHVEENJIT KAUR/ pic credit: taliworks.com.my

TALIWORKS Corp Bhd offers a defensive earnings base, stable growth outlook and attractive dividend yield to potential investors looking for defensive thematic stocks.

In a note yesterday, RHB Research analysts Muhammad Danial Abd Razak and Eddy Do Wey Qing have a ‘Buy’ call and fair value of 97 sen on the stock, which is derived based on a discounted cashflow model.

“Our fair value implies financial year 2021 forward (FY21F) with the enterprise value to the earnings before interest, tax, depreciation, and amortization (EV/Ebitda) of 14.3 times.

“The stock offers a defensive earnings base, stable growth outlook and attractive circa 8% FY21F dividend yield, earning a spot at the top dividend-yielding stocks in RHB Research’s coverage universe,” they said.

The analysts said near-term rerating catalysts could come from a positive outcome on tariff revision for its solid waste management segment and potential mergers & acquisitions (M&A), or contract awards.

Taliworks is a pure-play infrastructure company primarily engaged in water treatment, supply and distribution, which involve management and operations & maintenance (O&M) of water treatment plants and water distribution systems for Sungai Selangor Water Treatment Works Phase 1 and Langkawi.

It is also engaged in toll highway O&M — namely for the Grand Saga and Grand Sepadu highways — engineering and construction, and waste management.

The analysts believe the group’s defensive earnings stream is from mature concessions. “We expect the company to generate stable revenue in the coming years, sustained by scheduled rate hikes and population growth. The former could also support the expansion of Ebitda margins given the steep increase in near-term toll rates.

“We consider future earnings stream to be more predictable with lower risk,” the RHB analysts stated.

To augment its organic growth, Taliworks has a focused M&A strategy in place which aims to return a 6% dividend yield and 12% equity internal rate of return, which is fair in RHB’s view.

“We believe the company could be in the running for more O&M contracts for water assets in other states in Malaysia (particularly West Malaysia) due to its expertise and track record in Selangor and Langkawi.

“Its net cash position of 11 sen per share as at end-2019 should provide ample room for future acquisitions,” they noted.

As for the company’s dividend yield, in light of the current economic situation, coupled with the low interest-rate environment, RHB reckons quarterly dividend payments should provide attractive and sustainable cashflow for shareholders.

As at the fourth quarter of 2019, Taliworks declared a higher quarterly dividend of 1.65 sen per share, an increase of 32% from 1.2 sen per share. The company paid a total dividend per share of 5.25 sen in FY19 (FY18: 4.8 sen; +9% year-on-year).

“Risks to our call include an unfavourable outcome on tariff revisions, restrictive cashflow from its associates and joint ventures given the step-up repayment of bonds/sukuk, deteriorating asset quality giving rise to higher operating costs, a broad-based economic slowdown and escalating waste management costs dragging the company into losses,” they said.

Additionally, Muhammad Danial and Do noted that compared to Taliworks’ peers in the Kuala Lumpur Utilities Index and selected construction peers with long-term concessions, Taliworks trades at a circa 40% premium to average peer FY21F EV/Ebitda.

“We think this is reasonable given that the stock is less exposed to regulatory reforms compared to its gas and power counterparts, while offering generous yet sustainable quarterly dividend payments with near-term catalysts that could further unlock value in its existing concession business,” they added.

Taliworks’ share price rose half-a-sen or 0.59% to 86 sen yesterday, with a market capitalisation of RM1.72 billion.