TRC Synergy - BUY - 28 Aug 2008

TRC Synergy - 1H08 net profit within expectations (Results Note)



Price: RM1.35

Target Price: RM3.70

Recommendation: BUY



· 1H08 net profit of RM22.6m was within our estimates at 47% of our full year estimates and consensus of RM47.8m and RM45.5m. Volatile building material prices and one time losses from property division of RM15.8m resulted in erosion of EBITDA margin of 7% to 11.5%. Nevertheless, TRC is able to progress as scheduled due to its management competence. Its net cash position of RM62m also enabled it to secure building materials on a timely basis and at more favourable pricing.

· Stripping out the RM15.8m property loss, 1H08 net profit would have been RM38.4m or 80% of full year estimates consensus. Corresponding net margin would have been 11.4% compared to 9.5% in 1H07 which is a very commendable effort given that building materials cost have risen more than 40% over the same period.

· 2Q08 net profit RM10.6m was 11.4% lower QoQ but 4.1% higher YoY, despite substantially higher revenue which rose 44.8% and 95.8% QoQ and YoY respectively due to the aforementioned property division losses.

· We are maintaining FY08 and FY09 forecast of RM47.8m and RM46.0m respectively. TRC has RM867m of unbilled order book to be completed up to early 2010 which are all on track and within budget. Its enviable balance sheet and strong track record will enable it to secure more lucrative jobs while some contractors are abandoning projects as the cost overrun will result in more losses upon completion of project.

· Maintain BUY with target price of RM3.70 based on FY08 Fully Diluted EPS of 30.4 sen using the average PER of 12x for smaller construction companies. The share is currently trading at attractive FY08E and FY09E PER of 5.8x and 6.1x respectively.