News

TRC Synergy has entered into a Joint Land Development Agreement with Syarikat Prasarana Negara Bhd to develop a 49,776 sq m (~12.3 acres) land located in Jalan Lapangan Terbang Subang, Petaling Jaya, surrounding Station 2 (Ara Damansara station) of the Kelana Jaya LRT Line Extension Project.

The proposed development has a GDV of RM687.6m and is expected to be developed within 60 months upon approvals of the Development Order and Building Plan.

Comments

Better than contract awards  We are positive on this deal as property projects tend to garner higher margins compared to the conventional construction contracts. Hence, this will lift TRC’s earnings margin going forward compared to the current EBIT margin of 3.5%.

It is also a natural progression for construction players to move up the value chain into property developments given their engineering expertise and cost savings through having their own construction division. Moreover, by virtue of being the main contractor for Package A of the Kelana Jaya LRT Line Extension Project, there will be synergies arising from savings on mobilisation costs and better project planning.

19 sen/share  This venture is of significant size and the GDV of RM687.6m spread over 5 years (RM137.5m/year) makes up 24% of FY12’s revenue. Based on a 5-year development period, 18% PAT margin and 10% discount rate, this venture translates to 19.1 sen/share (FD: 13.9 sen/share) for TRC.

Should sell well... Based on previous joint property developments with Prasarana, we believe that 20% of the GDV (RM137.5m) would be land compensation cost. Hence, assuming a plot ratio of 4x, land cost works out to RM64.2/sq ft/plot ratio. Adjusting for 40% setback, net saleable area works out to 1.29m sq ft. Based on the GDV of RM687.6m, ASP ~RM534.7/sq ft, which is within the ASP of RM500-800/sq ft in the vicinity. Hence, take-up rates should do well.

Earnings visibility  Meanwhile, TRC will be busy with its outstanding order book of ~RM2.1bn, translating to ~3.6x FY12’s revenue and ~8.1x order book-to-market cap ratio.

Risks

Single project concentration and execution risk in the LRT project; Regulatory and political risk; Rising raw material prices; and Unexpected downturn in the construction sector.

Forecasts

Unchanged until further clarity on the timing of launches.

Rating

HOLD

Although the latest venture will improve TRC’s fortune going forward, we are still maintaining our HOLD call as the property profits have yet to materialise and the company has to continue to deliver in the subsequent quarters before sentiment towards the stock is revived.

Valuation

• Maintain Target Price of RM0.57 based on unchanged P/E of 10x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research - 26 Mar 2013