AFFIN Hwang Capital expects Taliworks Corporation Bhd to raise its dividend payout to 1.8 sen for the fourth quarter ending Dec 31, 2019 (4Q19) from 1.2 sen in 3Q19, given its improved financial position following the successful securitisation of its receivables to raise RM665 mil cash.
“From a net debt of RM299 mil in 3Q19, we estimate Taliworks has turned to a net cash position of RM366 mil or 18 sen/share. Maintain buy with higher 12-month target price of RM1.18.
“We believe the potential catalyst for an upward re-rating of the stock is an increase in dividend per share (DPS) by 30%-50% as indicated by management. Management prefers to adopt a sustainable dividend payout rather than paying a one-off special dividend,” it said.
The research house estimates Taliworks’ DPS at 7.2 sen in 2020, assuming a 50% increase from 2018’s level. This translates into an attractive net yield of 8.3%.
Taliworks has sold its receivables due from Air Selangor for RM665 mil or 33 sen per share to an independent special-purpose vehicle, Starbright Capital, which in turn issued asset-backed medium-term notes to finance the acquisition.
Higher-than-expected disposal price
Affin Hwang notes that the RM665 mil disposal price for the receivables due from Air Selangor was higher than its discounted cash flow (DCF) valuation of RM638 mil assumed in its previous RNAV/share estimate of RM1.24 for Taliworks.
“We gather that the realised value was based on a low discount rate of 3.8% (similar to yield on Cagamas bonds) compared to our assumption of 5% to derive our DCF valuation. We raise our RNAV/share estimate to RM1.30 to reflect the higher realised value for the receivables,” it said.
Lower interest income accretion
However, the disposal of the receivables has prompted the research house to reduce its interest income forecasts to 2.7% per annum on expectations of lower returns on cash proceeds compared to the 5.25% per annum interest rate on outstanding receivables agreed by Air Selangor.
As such, Affin Hwang cut its core earnings per share (EPS) by 12% in 2020-21E.
The research house pointed out that Taliworks has been unsuccessful in recent water-related project tenders due to the stiff competition, but there are opportunities to tender for projects to lay new pipes or replace old pipes to reduce non-revenue water in several states such as Selangor.
“Taliworks is also exploring new investment opportunities in renewable energy, eg rooftop solar, off-grid power system and waste-to-energy projects. However, we believe there are no imminent investments expected, given management’s decision not to participate in the Large-scale Solar Phase 3 tenders.
“Hence, we believe Taliworks will increase dividend payout to a new sustainable level given its improved financial position and strong cash flow generation from its water and toll highway infrastructure concessions.” It added. The counter closed 3.45% higher at 90 sen at midday break. – Dec 30, 2019
