We initiate coverage on TRC Synergy with a BUY recommendation and TP of RM0.40/share based on our SOP calculation with a deep 50% discount; reflecting small cap status and heavy public sector reliance. Job opportunities are poised for an inflection buoyed by MRT3 to which we consider TRC a strong contender due to: (i) Bumi contractor status, (ii) extensive track record in mega railway projects spanning stations, viaducts and depots and (iii) healthy balance sheet (net cash). TRC’s market cap trades at a -15% discount to its net cash position (1QFY22), we believe the market has ascribed a negative value to TRC’s real estate assets which we think is unwarranted.

Established infra player. TRC Synergy Bhd was listed on the Main Market of Bursa in Aug 2002. Its core business is construction where it has completed an extensive range of projects such as railways, highways, bridges, airports, submarine bases, port structures, prisons, stadiums and high rise buildings. TRC is accorded a G7 license and Bumiputra status contractor by CIDB enabling it to undertake projects of unlimited size and tender for jobs that are only eligible for Bumiputra contractors. Thus far, the company has won RM3.65bn worth of mega railway jobs.

Inflection in contract wins ahead? After three consecutive years of anaemic contract wins (FY19-21), we believe jobs are in for an inflection point buoyed by the incoming MRT3 project. We consider TRC to be a key beneficiary considering its: (i) Bumi contractor status, (ii) extensive track record in mega railway projects spanning stations, viaducts and depots and (iii) healthy balance sheet (net cash). To note, in the past TRC secured bumper contracts worth RM1.32bn and RM846.5m from MRT Putrajaya and MRT Kajang lines respectively.

Foreign assets compound undervaluation. Across the pond, TRC owns a 4.5 star freehold hotel (100%) located in Melbourne, Australia. Based on actual transacted data for hotels in the area, we arrive at a conservatively estimated value of RM141.3m for TRC’s hotel. The company also owns another ~200 plots of unsold land in Wallen, Melbourne through its 33% stake in Springridge Partnership. The going price for each plot is AUD300k-400k. Taking into account TRC’s market cap trades at a -15% discount to its net cash position (1QFY22), we believe the market has ascribed a negative value to TRC’s assets which we think is unwarranted.

Lacklustre before picking up. Going forward, we are forecasting uninspiring FY22 and FY23 earnings before picking up by 31.8% YoY in FY24. This will be primarily be driven by contract wins from the upcoming MRT3 project. We have factored in construction contract wins of RM800m in FY22 as well as RM500m in both FY23 and FY24. Nonetheless, billings recognition will only pick up meaningfully starting 2024 due to the “S-curve”. All in for the period FY22f-24f our forecast suggests profit CAGR of 5.9%.

Initiating coverage with BUY; TP; RM0.40. We initiate coverage on TRC with a BUY rating and SOP-driven TP of RM0.40 based on 50% discount. At our TP, TRC trades at a FY22f/23f/24f P/E multiple of 10.3x/10.4x/7.9x. We believe attaching a 50% discount (vs 20-30% for larger peers) is warranted considering its smaller size and weak replenishment in the last 2 years. While our earnings forecasts suggest lacklustre financial performance in the near term, at current price trading below its net cash we deem TRC to be undervalued as we see the company as a key Bumi beneficiary of MRT3. Key upside risks: MRT3 contract wins, lower cost pressure; Downside risks: substantial project delays, higher costs pressure, labour shortage, and sluggish tourism recovery.

Source: Hong Leong Investment Bank Research - 5 Jul 2022