News

News reported that a construction equipment hoisted by a crane at the LRT extension site at KM15 of Jalan Lapangan Terbang Subang accidently fell onto two vehicles during Friday evening, which claimed a life while seriously injuring another. Subsequently, Prasarana has issued a stop work order to TRC to facilitate investigations of the incident.

Comments

About the contract... To recap, TRC Synergy was awarded Package A of the Kelana Jaya LRT Extension project for RM950m back in Nov-10. The project now constitutes 33% (RM680m) of its RM2.1bn outstanding order book (see Figure #1). It also represents 1.2x FY12’s revenue and 2.5x order book-to-market cap ratio.

Contract at risk? Not wanting to jump into conclusion, the extreme scenario would be for Prasarana to replace TRC as the contractor. However, by doing so, Prasarana will be incurring additional costs and face further delays for the completion of the LRT extension project which is already facing cost overruns and delays by a year to 2015.

Compensation definitely... Depending on the investigation, we believe that a more likelihood outcome is compensation for both victims and to Prasarana for the delays. Meanwhile, we believe that the investigation may take several months to resolve and any idling costs will have to be borne by TRC.

Worst case scenario... Removing earnings contribution from the LRT project, our forecasted FY13 and FY14 earnings will be cut by 27% and 24% to RM19.1m and RM21.5m respectively. Hence, reducing our Target Price by 25% to RM0.43 based on 10x average FY13-14 earnings.

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 pending outcome of the investigation.

Rating

HOLD

We are maintaining our HOLD call pending the outcome of the investigation, while the company has to continue to deliver in the subsequent quarters before sentiment towards the stock is revived.

Nevertheless, the news is likely to affect investors sentiment towards the stock in view of uncertainties about the outcome of the investigation, potential compensation (which will further erode its profitability) and delay in the project.

Valuation

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

Source: Hong Leong Investment Bank Research - 1 Apr 2013