TRC Synergy at an inflection point

TRC Synergy Bhd (July 7, RM1.80)
Initiating coverage at RM1.76 with buy rating and fair value of RM2.40:
Late last year, TRC surprised the market when it outbid many of the larger contractors to secure the RM950 million Kelana A LRT extension contract. Although TRC has never undertaken a job of such magnitude, we believe execution is not an issue. In 2007, the company secured the RM405 million Sepangar Bay submarine base project on a competitive bid and completed it within the estimated profit margin. To mitigate rising material prices, TRC will subcontract out 50% of the works and lock in its steel exposure.

The same contractors pre-qualified for LRT A are eligible for the B portion as the tender and evaluation processes are mutually exclusive. TRC has submitted its bid for the LRT B project and is keen on the Kelana portion (RM700 million). In our view, TRC's bid should be competitive given the economies of scale from LRT A. Awarding the job to TRC would also allow for better integration between A and B. Even if TRC does not win the main contract, it could still play a role as subcontractor.

Some 70 contractors have been pre-qualified for the MRT (Sungai Buloh-Kajang line) elevated portion worth RM12 billion, which will be implemented in 20 packages. We expect TRC to leverage on its LRT track record and secure some packages for the MRT. Being one of the larger and more experienced bumiputera contractors also gives TRC an edge, especially in light of the recent controversy over the lack of bumiputera participation in the MRT.

TRC is the only peninsula-based contractor with a UPK Class A licence for Sarawak, which enables it to bid for state-funded jobs. It has quite a good track record in Sarawak, having completed over RM700 million worth of jobs in the state. TRC has tendered for most of the RM2 billion worth of roads to be awarded in Sarawak. The first phase of awards worth RM500 million should be out soon.

On an ex-cash basis, TRC trades at an attractive FY11/FY12 price earnings ratio of 6.1 times and 4.5 times. Its balance sheet is strong with RM182 million net cash, making up 54% of its market cap. Our RM2.40 fair value is based on a fully diluted revised net asset value comprising: (i) 12 times mid CY12 earnings; (ii) net cash per share; and (iii) proceeds from warrants conversion. With a 36.2% upside, we initiate coverage on TRC with a "buy". — OSK Research, July 7

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