Highlights

Laggard so far… YTD, the KLCON Index has risen 22.5%, while TRC’s share price has lagged behind, rising by only 7.0%. We believe that this is due to disappointing earnings growth over the last four years despite having successfully replenished its order book.

Following, 1Q’s encouraging results, we believe that TRC is reaching its inflection point for an upwards rerating in its share price on the back of earnings recovery, potential contract wins and stronger property development profits.

LRT progresses forward… Delays in utility relocation works and DO permits from the respective town councils have been resolved allowing works for the LRT to progress ahead smoothly. Moreover, the stop work order has been lifted following the LRT mishap which occurred back in Apr- 13. More importantly, we believe that the concentration risk of relying on the LRT project for construction profits has been diversified substantially from as high as 85% (in Mar- 11) to 35% as of Apr-13.

Taxman bites… Based on our estimates, normalising tax rate to 25% for FY12 earnings, TRC would have posted stronger earnings of RM18.1m, translating to earnings growth of 39% instead.

Good start… TRC was off to a good start in 1QFY13 whereby revenue and earnings made up 24.1% and 21.8% of our estimates respectively. 1QFY13’s earnings were also the highest since 2QFY11. With two unfortunate events out of the way, we believe that TRC is back on track for earnings growth.

Value in Ara D’sara… The prized asset for TRC would be the JV with Prasarana to develop a 12.3 acres land located in Jalan Lapangan Terbang Subang, Petaling Jaya, surrounding Ara Damansara station. The expected GDV of this development has increased by ~24% to RM850m from RM687.6m. Based on our estimates, this venture translates to 22.5 sen/share (FD: 16.4 sen/share) for TRC.

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.

Rating

BUY

We are encouraged with the prospects for earnings recovery in the subsequent quarters and the potential profits from the Ara Damansara development venture. We believe that the outlook for order book replenishment remains bright for TRC and its earnings are backed by order book visibility which translates to 3.2x FY12’s revenue. In view of slightly >10% upside, we upgrade our call on TRC to a BUY.

Valuation

Maintain Target Price of RM0.68 based on unchanged 12x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research - 30 Jul 2013