We remain favourable on TCS Group Holdings Bhd (“TCS”) as our construction recovery pick. Fundamentals are solid with strong growing orderbook and healthy balance sheet with net cash position. Continue to recommend BUY with a target price of RM0.75 based on 9x FY21 PER as per closest industry peers.

Since TCS’s debuted on ACE Market in July last year, the group continues to secure new projects despite challenging landscape during the period. Outstanding orderbook registered a sturdy growth from RM420.0m as of June 2020 to RM898.3m as of Sept 2020, providing earnings visibility over next 3 years. Among the latest project wins are RM323.0m from Mah Sing M Arisa Project, RM146.3m from Vista Sentul Residences Project and RM68.4m from Sime Darby Elmina Green Three.

Recent proposed acquisition to acquire 25% stake in Southern Score Sdn Bhd (“SSSB”) is set to provide additional earnings to the group. The acquisition comes with profit after tax guarantee of not less than RM20m/year from FY21 to FY23, translating to an average profit after tax of RM5m/year to TCS. This implies a forward PE valuation of 6x, which is lower than the comparable listed companies in Bursa. Besides being TCS’s existing customer, SSSB is a Grade 7 contractor and the collaboration should create synergies for both parties to expand construction business. The acquisition will be done via an issuance of 60m new shares in TCS at RM0.50/share with expected completion in 1QCY21.

To recap, TCS’s revenue growth was mainly centred on private residential projects (residential: 78% and commercial 22% in FY19) having a proven track record of completing its construction projects ahead of schedule. Key notable clients include IJM Land Group, Worldwide Holdings and Tropicana Group. The group are also in plan to expand infrastructure construction services.

Tenderbook stands at RM2.6bn, with historical success rate of 20%-30%. Balance sheet remains sound with net cash of 6.2sen/share, equivalent to 12% of share price. Looking forward, we expect orderbook to continue growing driven by the resumption of construction activities by the government especially within the infrastructure sector.

Source: Rakuten Research - 11 Jan 2021