News  Yesterday, TRC announced that its wholly-owned subsidiary, ADS Projek Sdn Bhd had entered into a Joint Land Development Agreement with Syarikat Prasarana Negara Berhad (“Prasarana”) for the proposed joint development of a portion of land surrounding Station 2 of Kelana Jaya Line Extension Project with a total land area of approximately 12 acres. 

Comments  The development, which is targeted to be launched in 2H13 and completed in 5 years, comprises of basement parking, retail podium with car parks, LRT users car parks, office units, hotel, residential apartments, retail and food court and SOHO with an estimated GDV of RM687.6m. 

 We like the joint development with Prasarana as it will be TRC’s first rail plus property project. We deem the land cost of RM135m, as guided by management and worked out to about 20% of the GDV, as fair as TRC is not required to fork out cash in advance for the land. The payment for the land to Prasarana will be on a milestone basis. 

 Based on the management funding requirement guidance of RM200m, we expect the company’s net gearing to hit 0.6x from a net cash position now. We, however, expect the net gearing to fall below 0.5x once TRC completes the basement parking and retail podium and receives the continuous billings.

 That said, we still prefer contractors-turned developers to keep their net gearing to below 0.5x in the current times of global uncertainties. 

Outlook  TRC’s construction outstanding order book comfortably stands at c.RM2.0b, providing it earnings visibility for the next three years.

 Moving forward, we expect better earnings contributions from its property segment by FY15, underpinned by its joint development with Prasarana above. 

Forecast  We have tweaked our FY14 forecast higher by 9% from RM37.6m to RM41.1m as we factored in the possible earnings contribution from the joint development. 

Rating MAINTAIN MARKET PERFORM 

 We are maintaining our MARKET PERFORM recommendation at this juncture given uncertainty arising from the upcoming GE. 

Valuation  We are keeping our TP unchanged at RM0.63 based on 8.0x Fwd. PER on its FY13E earnings.

Risks  Price escalation in raw materials and labour costs.

Source: Kenanga