TRC remains highly levered to the MRT3 project rollout with a worst case target of RM600-800m contract wins from the project. Other pockets of opportunities lie in Sarawak such as PBH Sarawak extension and SSLR. Its property arm aims to commence construction of Phase 2 Ara Sentral in 3QCY23 with launch possibly in FY24. Its recent arbitration award of RM75m (HLIBe) is pending receipt which might bolster 1QFY23 earnings by RM8m (non-core). Business units in Australia remain suboptimal amidst weak property sentiment and still sluggish tourism recovery. Tweak FY23/FY24 earnings forecasts upwards by +0.1%/+6.3%. Maintain HOLD with slightly higher SOP-driven TP of RM0.35.

We Met With Management Recently With the Following Key Takeaways:

Construction. TRC’s current unbilled orderbook stands at RM700m translating to 1.2x of FY22 construction revenue. Contracts wins in FY22 were marginal and did not meet announcement threshold. The last announced project was RM43m maintenance jetty project in Sabah from a recurring customer in FY21. Approximately 50% of its unbilled orderbook is due for completion in FY23. Tenderbook stands at RM3.8bn where we estimate ~RM3.0bn to be the MRT3 CMC301 tender (100% stake). The remainder could consist of open tender road projects where we learnt competition is intense. We now expect MRT3 Tier 1 awards in 2H23 pending completion of realignment studies and potential further cost cuts. Assuming an unsuccessful Tier 1 bid, TRC aims for RM600-800m wins as Tier 2 contractor. MRT3 aside, there are opportunities in Sarawak for PBH Sarawak extension, SSLR as well as multiple “sick” projects (est. value ~RM50m each). Apart from the aforementioned job in Sabah, the company generally shies away from the state due to operational risks.

Brunei. As highlighted earlier, TRC obtained the final award from Singapore International Arbitration Centre against BEDB in relation to the Brunei International Airport project. We gather that the amount owed including interest is ‘RM70m plus’, not too dissimilar to our earlier estimate of RM75m. Nevertheless, the debtor has asked for an extension to the payment deadline to mid-March 2023 from early Feb- 2023. While management has not ruled out the possibility of special divvy, we believe this is contingent on its MRT3 bid and financing needs for Phase 2 of Ara Sentral. If funds are received as scheduled, there will be an impairment reversal of RM8m in 1QFY23.

Property. TRC has started planning for the Phase 2 of Ara Sentral (GDV: RM500m). It is a mixed development consisting of retail units as well as three blocks of serviced apartments. Around 80% of the development is earmarked for sales with the remainder 20% meant for leasing. TRC will be sinking in additional RM60-70m to complete substructure works (tentatively commencing in 3QFY23) before launching the project. To recap, the entire Ara Sentral development carries a GDV of RM1.1bn divided into five phases. Meanwhile in Australia, its JV continues to face challenges due to higher interest rates and strict lending conditions. Thus, we expect settlements to remain sluggish.

Forecasts. We tweak FY23/FY24 earnings forecasts upwards by +0.1%/+6.3% in light of quicker than expected phase 2 developments and higher replenishment assumptions for FY23.

Maintain HOLD; TP: RM0.35. Maintain HOLD with slightly higher SOP-driven TP of RM0.35 (from RM0.34) based on 50% discount. At our TP, TRC trades at a FY23f/24f P/E multiple of 11.0x/9.5x. We believe attaching a 50% discount (vs 20-30% for larger peers) is warranted considering its smaller size and weak replenishment in the last 3 years. Net cash/share remains rather healthy at RM0.24 (in 4QFY22), as such, further downside could be limited. Key upside risks: MRT3 contract wins; Downside risks: substantial project delays, higher costs pressure, labour shortage, politics and sluggish tourism recovery.

Source: Hong Leong Investment Bank Research - 13 Mar 2023