Saturday November 3, 2007

Brokers' Call

Compiled by ERROL OH

TRC SYNERGY BHD (RM1.97 as at Nov 1)

TRC Synergy Bhd is mainly involved in construction, property development and related businesses such as manufacturing of construction materials. To build a more stable earnings base, it is looking to increase its exposure to the downstream oil and gas (O&G) sector and to privatisation of government projects. These two areas, plus construction and property development, will form TRC's four key business groups, following a planned reorganisation of its corporate structure.

Comment by Standard & Poor's: TRC recently secured several Ninth Malaysia Plan (9MP) projects and is well positioned to secure more such contracts due to its improved financial position, and technical and execution capabilities. Last January, the company raised almost RM62mil in a capitalisation exercise.

Since March 2006, it has secured RM883mil worth of construction projects. The order book is about RM1.3bil, of which we estimate RM970mil is unbilled. The target is to double the order book size in six to 12 months.

TRC is likely to be given additional work on existing projects, such as the expansion of the Kuala Terengganu airport and potential variation orders of the Sepanggar Bay Submarine Base in Sabah. In addition, the builder is vying for more 9MP projects and is negotiating for RM1.5bil worth of privatisation projects.

At the same time, it seeks to capitalise on its strong presence in Sabah and Sarawak. Its latest major project there is an RM18mil job to construct palm oil bulking facilities in Bintulu.

On the property development front, TRC has a total landbank of almost 200 acres. About 160 acres is in Plentong, next to the established Permas Jaya housing areas in Johor. Property sales remained slow due to the soft property market in the state and contribution to turnover was not significant, comprising only about 5% for the first half of financial year 2007 (1H07). We expect property development profits to be muted going forward.

Recommendation: We are positive on TRC's earnings prospects because of (i) its fast-expanding order book, being a beneficiary of the 9MP; (ii) prospective RM1.5bil worth of privatisation projects, which it is negotiating for; (iii) potential increase in job scope from existing projects; (iv) strong presence in East Malaysia where it stands to benefit from increased spending there; and (v) expansion into the O&G sector via the privatisation of facilities or the acquisition of stakes in small O&Gs companies with expansion potential.

The share price has risen steadily by about 40% since the beginning of the year and is trading at price earnings ratio (PER) of 7.9 times (x) and 5.4x on our 2007 and 2008 forecasts, which in our view is undemanding.

As a result, we upgrade our recommendation to STRONG BUY from BUY with a higher 12-month target price of RM2.65 (versus RM2.38 previously). We continue to value TRC based on blended 10x (unchanged) PER and 1.2x (unchanged) price-to-book (P/B) target multiples (assuming full dilution of loan stocks) with 2008 being our target valuation period. The target multiple is within our valuation range for small-and mid-sized construction companies.

Last edited on Sat Nov 3rd, 2007 08:06 by Moolah

TRC Synergy
1H07 net profit within expectations.
BUY
RM1.72
Target Price: RM4.37

1H07 net profit was within our estimates. 1H07 net profit of RM 16.7m was 54% our full year FY07E net profit of RM30.6m. Despite a seasonally weak 1Q07 results, 2Q07 showed significant improvement due to larger progressive claims on two key contracts being Bentong prison and Jalan Sibu. Progressive claims from Sepanggar submarine base and Dang Wangi police HQ also commenced in 2Q07.

2Q07 net profit was 39% higher than 1Q07 due to a combination of higher progressive claims with 1Q07 being seasonally shorter working period with the festive holidays and lower tax rate of 22% compared to 31% in 1Q07. Normalised tax rate are expected going forward given that TRC had hired tax consultants to improve its tax planning. 1Q07 was hit by higher non deductible expenses.

YOY, 2Q07 net profit was significantly higher as TRC are now working on higher margin contracts which were secured in 2H06. Thisi s also reflected in 2Q07 EBITDA margin being 16.8% compared to 8.5% in 2Q06.

Sharp improvement in 1H07 EBITDA margin to 18.5% compared with 12.7% respectively reflects the economies of scale of larger contracts as well as more technically challenging jobs that TRC is securing which have higher margins.

We are maintaining FY07 forecast as we expect work and progress billings to pick up from in 2H07 onwards with Sepanggar submarine base and Dang Wangi police HQ to start contributing substantially while its other projects, namely Kuala Trengganu airport extension, Jalan Sibu and Bentong prison which are all scheduled to be completed by 2008. We expect TRC to announce securing more contracts soon which could boost its already large order book of RM1bn significantly.

Maintain BUY with target price of RM4.37 based on FY08 Fully Diluted EPS of 29.1 sen using the average PER of 15x for smaller construction companies. The EPS has been adjusted lower taking into account a larger share base from new ESOS. TRC remains attractive trading at FY07E and FY08E PER of 9x and 6x respectively.

24-08-2007: TRC Synergy 2Q07 net up 26-fold to RM10.2m
by Surin Murugiah

KUALA LUMPUR: TRC Synergy Bhd net profit for the second quarter ended June 30, 2007 (2Q07) surged 26-fold to RM10.2 million from RM379,958 a year ago driven by progressive billing of several high-value projects.

Its revenue grew 114% to RM101.6 million from RM47.5 million, while earnings per share stood at 7.75 sen from 0.36 sen a year ago.

TRC specialises in building and infrastructure construction, turnkey design and building contracts, as well as manufacturing and dealing of concrete products, property development and project management services.

In a statement yesterday, TRC executive chairman Datuk Seri Sufri Mohd Zin said the company was optimistic that its financial performance in the second half of this year would continue to improve.

“Moving forward, the group is also eyeing for more technically-challenged design-and-build projects which will yield better profit margins for the group.

“Our total order book currently stands at RM1 billion, which provides TRC with a secured revenue stream throughout 2007 and 2008,” he said.

Sufri said the company, with its expertise and track record in handling technically-challenged design-and-build projects, was poised to gain from the rapid infrastructure development taking place in the country.

“Currently, we are also bidding for new projects worth approximately RM1.5 billion,” he said.

Among the company’s ongoing projects are construction of the Bentong prison, runway extension of the Kuala Terengganu Airport and the Sapangar Bay submarine base in Sabah.

Malaysia's PM Badawi officially launched the East Coasts Economic Region (ECER) that aims to propel 3 states in the East Coast of Peninsular Malaysia - Kalantan, Terengganu and Pahang - into development power houses by 2020

Key details include:

- RM112bn worth of investments in 227 projects will be undertaken by the Federal Govt, GLCs as well as the private sectors

- A special RM6bn allocation made for several high-impact projects

- Target industries include tourism, oil & gas, timber, rubber wood, education, animal husbandry and furniture manufacturing

ML View

Although not much details were released on individual projects, it does appear that the ECER is a repackaged product from the 9th Malaysia Plan.  It could also be perceived as a political move ahead of a General Elections.  Nevertheless, the government will certainly increase spending in certain key areas and the companies below, who have experience and expertise in these segments, are likely to be beneficiaries. 

On the construction and infrastructure front, both TRC (our company visit note attached below) and Ahmad Zaki are front runners while on the oil & gas front, the likes of Kencana, Scomi and Muhibbah are favourites to obtain key projects.

Saw this update from OSK

BUY Maintain
Price RM2.04
Target RM3.01

TRC Synergy
More of East Coast in the House

TRC recently announced that it had received a letter of intent to engage in upgrading of the Kuala Terengganu Airport. This does not come as a surprise to us as they are already conducting some works at the same airport. Earnings impact should be positive for FY08 and FY09, based on our estimates. In our view, current valuations remain a bargain. BUY call maintained with a target price of RM3.01.

More from Kuala Terengganu. Yesterday, TRC made an announcement on Bursa Malaysia that it’s wholly owned subsidiary had received a letter of intent from Jabatan Kerja Raya (JKR) to engage in upgrading works of the Kuala Terengganu Airport. To avoid confusion, this project is on top of TRC’s current runway extension works at the same airport (outstanding balance is RM150m).

Project details. From our conversation with management, they mentioned that the project would involve a further extension of the airport’s runway to cater for the landing of wide bodied planes (e.g. Boeing 747). Management has also specified that the project would require some land reclamation works as the runway will be extended into the sea. The timeline. Although details of the project’s commencement and completion are rather sketchy at this juncture, we understand that the full airport upgrade will have to be completed by end 2009. This is because “Visit Terengganu Year” will be launched shortly thereafter. Working on this timeline, management believes that construction works will have to begin in 1Q 2008, latest. We expect the letter of award to be out by year end.

Positive impact going forward. From our understanding, an extremely conservative estimate of the project’s value would be RM200m. At this point, we do not impute any impact of the project into our earnings forecast. However, assuming that (i) the project’s value is RM200m and (ii) the project spans from beginning FY08 to end FY09, our FY08 earnings forecast would increase by 16%.

A huge discount. Albeit a low base in FY06, we project a 162% and 68% y-o-y earnings growth for FY07 and FY08. Margin expansion should continue moving forward driven by more projects that are secured on a negotiated basis rather than open/ selective tender. Trading at only 8.1x FY08 earnings on a fully diluted basis, TRC’s valuations are very undemanding. We value TRC at RM3.01 based on 12x FY08 fully diluted EPS. With a 48% upside, we rate TRC a BUY.

Comments..

I believe this announcement from TRC is yet another indicator of this company's bright prospect.