SILK Holdings Bhd and Taliworks Corp Bhd are believed to be in exploratory talks for the sale and purchase of the former’s wholly owned subsidiary Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (Silk), several sources say.

“The talks are still early … and there are also a few things they still need to negotiate and agree on before they can take the discussions further,” says a source.

Silk is the concession owner of the 37km Kajang Traffic Dispersal Ring Road, better known as Kajang SILK Highway. The 33-year concession period ends in 2037.

Interestingly, the share prices of Silk Holdings (fundamental: 0.20; valuation: 0.30) and Taliworks (fundamental: 1.30; valuation: 2.40) started moving up last week. From 37.5 sen on Aug 17, Silk Holdings’ share price climbed 10% to touch 41.5 sen on Aug 19. It then adjusted and decreased to 41 sen on Aug 20. Meanwhile, from RM3.35 on Aug 12, Taliworks’ share price trended up to close at RM3.51 on Aug 20.

Last month, Taliworks executive director Ronnie Lim Yew Boon told The Edge Financial Daily in an exclusive interview that the group is eyeing assets in toll roads, waste management and power generation.

Taliworks is currently grouping its mature and stable operating infrastructure assets with predictable cash flows and will inject them into TEI Sdn Bhd, its joint venture with the Employees Provident Fund (EPF), in which it holds a 51% stake and the EPF 49%.

“We are leveraging our deal structuring and sourcing abilities and TEI shareholders’ financial muscle to bid for big projects. We have big plans in the areas of waste management, toll roads and power generation, be it in Malaysia or other developed countries, including Australia,” Lim told the daily.

Taliworks underwent an internal reorganisation last year that saw Cerah Sama Sdn Bhd — the holding company of Grand Saga Sdn Bhd, which is the concession owner of the Cheras-Kajang Highway — becoming an indirect subsidiary of the group. As a result of the restructuring, Taliworks started accounting for toll earnings in its 2014 financial year.

Prior to the restructuring, Taliworks had acquired a 55% stake in the then joint-venture company, Cerah Sama, in 2007.

Interestingly, Kajang SILK Highway serves townships connected to a number of other highways, including Taliworks’ Cheras Kajang Highway.

Additionally, Kajang SILK Highway also serves the southeastern corridor of the Klang Valley, linking Balakong, Sungai Long, Kajang, Bangi, Serdang and Putrajaya, as well as townships connected by the Sungai Besi Highway (Besraya), the North-South Expressway, Kajang-Seremban Highway (Lekas), South Klang Valley Expressway and, in the future, the KL Outer Ring Road.

Silk Holdings says in its quarterly finance report that the highway division improved its revenue by 13.6% to RM80.7 million for the nine months ended April 30, 2015, from RM64.6 million in the same period last year. This, it adds, was a result of the continued growth in traffic volume, increase in toll collection and toll compensation from the government.

“Consequently, the division’s loss before taxation was reduced to RM22.8 million, from the RM32.5 million recorded in 3Q2014, year to date,” it notes, adding that although the highway division will continue to record accounting losses due to the existing high finance and amortisation costs, it is expected to remain cash flow-positive on an operational basis.

Last November, IJM Corp Bhd’s unit Road Builder (M) Holdings Bhd and Silk Holdings mutually decided to abort the RM395 million acquisition of 100% equity interest in SILK. In an announcement to Bursa Malaysia, Silk Holdings said that all conditions precedent had not been fulfilled within the agreed timeline.

The share sale and purchase agreement dated June 20 then lapsed and ceased to have effect, IJM said.

The sale, which had been proposed last June, was to provide Silk Holdings with the flexibility to expand its oil and gas support services business, its largest source of revenue.

For the nine months ended June 30, 2015, Silk Holdings recorded an increase in revenue of 17% — RM312.6 million compared with the RM267.1 million recorded in the previous corresponding period — due to improved contributions from the oil and gas and highway divisions. However, its loss before tax widened to RM18.3 million from RM2.7 million a year earlier, following the RM24.5 million non-recurring charge associated with the distribution of employee trust shares in the company.

This article first appeared in digitaledge Weekly, on September 24 - 30, 2015.