Dividend-play Taliworks offers strong yield

Core water treatment business uninterrupted amid MCO

AT a time when heightened market volatility raises concerns on future stock prices, it is natural for investors – especially the riskaverse ones – to opt for high dividend yield stocks.

Taliworks Corp Bhd is one such stock in the Bursa Malaysia universe.

The counter, which is one of the top 20 small-cap “jewels” by RHB Research Institute for 2020, continues to be an attractive dividend play.

After delivering a higher dividend yield of 6.3% in the financial year of 2019 (FY19), up from 5.8% a year earlier, analysts expect the water player and highway concessionaire to offer a stronger dividend yield of about 8% in FY20.

Taliworks has previously been guided to pay out 6.6 sen per share in FY20. For comparison, the group paid 4.8 sen and 5.3 sen in FY18 and FY19 respectively.

“The implied dividend yield (for FY20) is 8%, based on the guided dividend payout – which is still at a commendable level, even by Malaysian market standards.

“In light of the current economic situation, coupled with the low interest-rate environment, the quarterly dividend payments should provide attractive and sustainable cash flow for shareholders,” according to RHB Research Institute analyst Eddy Do Wey Qing.

Affin Hwang Capital Research, which has chosen Taliworks as one of its top small-cap sector picks, expects the counter to deliver an attractive net yield of 8% in FY20-22. Meanwhile, CGS-CIMB Research projects a dividend yield of 7.95% in FY20-22.

A key question arises... would Taliworks be able to pay its dividend as previously guided, considering the impact of Covid-19 on its operating environment?

Executive director Datuk Ronnie Lim tells Starbizweek that the group remains committed to making sustainable dividend payouts, while leaving sufficient resources for growth.

The group stopped short of saying whether it will revise its dividend payout target for the year.

For the first quarter of FY20, the group has paid out 1.65 sen per share, up from 1.2 sen in the same quarter the last financial year.

Lim says Taliworks closed FY19 well with the monetisation of its receivables, whereby as of 1Q20, trade receivables stood at Rm109.4mil in contrast to 1Q19’s position of Rm743.6mil.

“Taliworks’ core businesses of water treatment, supply and distribution, toll roads together with its waste management associate company remained fully operational throughout the past months.

“All these businesses continue to contribute to Taliworks’ financial results and augur well for Taliworks’ long-term sustainable dividend payout ability,” he says.

Undeniably, Taliworks has been affected by the Covid-19 outbreak and more specifically, the movement control order (MCO) that began on March 18.

To be sure, the impact was mostly on its construction and highway divisions. In the January-march 2020 period, both divisions contributed about 25.3% or Rm21.34mil of the group’s total revenue.

In 1Q20, Taliworks reported a net profit of Rm15.9mil or 0.79 sen a share, representing an increase of 36% year-on-year (y-o-y).

Revenue, however, slipped to Rm84.2mil in 1Q20 compared with Rm88.9mil in the same quarter last financial year.

“With the completion of the disposal of receivables due from Air Selangor to a special purpose vehicle under an asset-backed securitisation exercise late last year, the group is in a strong cash position to seek investment opportunities and to pay sustainable dividends to shareholders,” it said in a filing with Bursa Malaysia on May 13.

Moving forward, Lim acknowledges that there will be some impact from the Covid-19 pandemic. However, he does not expect it to affect Taliworks’ ability to operate as a going concern.

Lim was also asked to comment on how the group would be affected in the second quarter due to the virus outbreak and the related containment measures such as travel restrictions.

“Similar to 1Q20, we anticipate that our water division and waste management division will operate without restriction, while there will be continued impact on our highway and construction businesses due to the extended MCO.

“However, we are unable to forecast the full impact of the pandemic as the situation is still evolving,” he says.

CGS-CIMB Research foresees Taliworks’ construction operating loss in 1Q20 to gradually turn around in the second half of FY20 (2H20), driven by recovery in billings and potential new orders.

“For highways, traffic volume for Grand Saga Highway (51% subsidiary) declined 13% y-o-y to 129,000 vehicles per day while associate Grand Sepadu Highway saw a 14% y-o-y contraction in 1Q20’s vehicles per day to 78,400.

“We expect traffic volume to recover gradually as industries resume operations following the lifting of restrictions during the conditional MCO in 2Q20 up till Jun 9, before normalising in 2H20,” the research firm says in a note.

Moving forward, RHB Research Institute believes that Taliworks could be in the running for more operations and maintenance (O&M) contracts for water assets in other states in Malaysia, due to its expertise and track record in Selangor and Langkawi.

“Future projects in new water treatment plants in Peninsular Malaysia should bring about more opportunities for the group to bid for long-term O&M contracts, which provide more recurring cash flows.

“Also, Taliworks’ net cash position provides ample room for future acquisitions,” it says.

Lim says the group plans to secure works related to the government’s mega infrastructure projects, once resumed.

“It will be a positive outlook for Taliworks should there be a resumption of mega projects as we continue our efforts to tender and pitch for more projects to replenish our order book,” he says.

A key concern about the outlook of Taliworks’ water treatment division is that its concession for the Langkawi operations will end in October this year.

With the cessation of Langkawi operations, the revenue and profitability of the group will be impacted towards the last quarter of the year.

In response to this, Lim says the Langkawi operations only contributed about 26% of the total revenue of the group’s water treatment segment.

“We are exploring other water related projects outside of Selangor as continuous effort is made to expand and explore potential value-accretive opportunities by offering our expertise and capabilities in the water infrastructure sector.

“With our strong cash and balance sheet position, we are able to explore brown field opportunities via mergers and acquisitions as well as build-operate-transfer or public-private partnership opportunities,” he says.

“All these businesses continue to contribute to Taliworks’ financial results and augur well for Taliworks’ sustainable dividend payout ability.” Datuk Ronnie Lim