News

News portals reported that a crane arm conducting piling work for the LRT extension project fell on a car parked on the side of a road at USJ 2/3 in Subang Jaya near Summit shopping center. There was no injury reported in the incident. Prasarana has issued a stop work order to TRC Synergy, pending investigation of the accident.

Comments

Second hit… This unfortunate accident is TRC’s second- LRT related mishap. The first accident occurred in end Mar- 13 (kindly refer to our report “LRT mishap” dated 1 Apr-13).

About the contract… To recap, TRC was awarded Package A of the Kelana Jaya LRT Extension project for RM950m back in Nov-10. The project now constitutes 35% (RM630m) of its RM1.8bn outstanding order book (see Figure #1). It also represents 1.1x FY12’s revenue and 2.1x market cap ratio.

Worst case scenario… Based on the worst case scenario by removing earnings contribution from the LRT project, our projected FY13 and FY14 earnings will be cut by 28% and 26% to RM18.8m and RM20.9m respectively. Hence, reducing our Target Price by 26.5% to RM0.50 based on 12x 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

BUY

We are disappointed by this development just as things were turning around the corner for the company. Execution risk for the LRT project has been a key concern for TRC’s share price.

However, given that the concentration risk for the LRT project has been substantially diversified from as high as 85% in Mar-11 (to the current 35%), we believe that any share price weakness will pose a good buying opportunity for the company as like previous instance, works will resume post investigation. Hence, we maintain our BUY call.

Valuation

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

Source: Hong Leong Investment Bank Research- 19 Aug 2013