HLG: 29 Feb TSR Capital - Poor results, but expect closure on Medical City to drive share price

TSR Capital Berhad BUY
Price target RM3.10
Share price at 28 Feb RM1.40


Investment summary


Normalized FY07 results were 10-30% ahead of forecast/consensus, but headline earnings were hit by kitchen sinking. We think FY08 EPS prospects remain positive, and that TSR is close to securing the lumpy RM1.7bn Medical City project. Maintain BUY. We like TSR due to: (1) the recent doubling of its order book to RM1bn, which translates into 45% EPS CAGR over FY06-09E, and a 50% FY08 PE discount to big-cap peers; (2) our expectation that the narrowing political window will drive accelerated government job-flow to small Bumiputra contractors; (3) potential upside from the future government approval of the Medical City PFI project, which we value at an additional RM1.00/share. We are negative on the Malaysian construction sector: (1) we believe sector valuations are at their cyclical peaks, and impute significant hope value; (2) investor expectation on government spending has switched from seeking surprises towards execution risk.


Bargain hunting

Share price has fallen 32% YTD and we think the current share price is a low-risk entry level. Catalysts are: (1) TRC trading at FY08E fully-diluted PE of 6x, a 50% discount to big-cap construction names; (2) near-term election cycle favoring small Bumiputra contractors; (3) possible announcement of RM1.7bn Medical City, which is worth RM1.00/share on DCF.