Stock Name: TRC
Company Name: TRC SYNERGY BHD
Construction sector
Maintain neutral: Over the immediate term, we expect construction stocks in general to perform only in line with the broader market due to 'news-flow fatigue'. We believe the market wants to see more substantive progress on the MRT project, not merely 'symbolic' moves such as the July 8 groundbreaking ceremony.
However, we believe there is still money to be made from small-cap construction stocks as it has become increasingly clear that: (i) smaller contractors can beat larger players in the battle for key packages of large-scale projects; (ii) they stand much better chances in winning new contracts thanks to their lean setup; and (iii) their attractive valuations vis-''-vis those of the larger players.
The lean setup of smaller players allows them to profitably execute: (i) certain smaller public jobs (worth RM50 million to RM100 million) that large players normally shy away from due to the lack of economies of scale to them; and (ii) sub-contracts of key large-scale projects. Given the massive scale of some of the proposed public infrastructure projects, particularly, the LRT line extension and MRT, we expect the local construction market to be awash with small sub-contracts.
We are raising our indicative fair values for Fajarbaru Builder Group Bhd, Gamuda Bhd, Hock Sin Leong Group Bhd (HSLG), TRC Synergy Bhd (TRCS) and WCT Bhd by 2% to 17%, while trimming those of IJM Corp Bhd and Malaysian Resources Corp Bhd (MRCB) by 2% to 3%, having rolled forward the base year for valuation purposes from 2011 to 2012. We make no changes to our stock recommendations ' 'outperform' for Fajarbaru, HSLG and TRCS; 'trading buy' for MRCB; 'market perform' for Gamuda; and 'underperform' for IJM and WCT.
Risks include: (i) the government reverting to an austerity drive to rein in the budget deficit; (ii) potential hiccups in the rollout of public projects; and (iii) the less-than-robust overseas construction markets, particularly, the Gulf states.
We are neutral on the construction sector, but bullish on small caps. We see a bright spot in small-cap builders due to: (i) their ability to win key work packages of large-scale projects; (ii) their better chances of winning smaller contracts and subcontracts of large-scale projects; and (iii) their attractive valuations. Our top small-cap picks for the construction sector are Fajarbaru (fair value: RM1.80) and TRCS (FV: RM2.26). ' RHB Research, June 28
This article appeared in The Edge Financial Daily, June 29, 2011.
Company Name: TRC SYNERGY BHD
| Research House: RHB | Price Call: BUY | Target Price: 2.26 |
Construction sector
Maintain neutral: Over the immediate term, we expect construction stocks in general to perform only in line with the broader market due to 'news-flow fatigue'. We believe the market wants to see more substantive progress on the MRT project, not merely 'symbolic' moves such as the July 8 groundbreaking ceremony.
However, we believe there is still money to be made from small-cap construction stocks as it has become increasingly clear that: (i) smaller contractors can beat larger players in the battle for key packages of large-scale projects; (ii) they stand much better chances in winning new contracts thanks to their lean setup; and (iii) their attractive valuations vis-''-vis those of the larger players.
The lean setup of smaller players allows them to profitably execute: (i) certain smaller public jobs (worth RM50 million to RM100 million) that large players normally shy away from due to the lack of economies of scale to them; and (ii) sub-contracts of key large-scale projects. Given the massive scale of some of the proposed public infrastructure projects, particularly, the LRT line extension and MRT, we expect the local construction market to be awash with small sub-contracts.
We are raising our indicative fair values for Fajarbaru Builder Group Bhd, Gamuda Bhd, Hock Sin Leong Group Bhd (HSLG), TRC Synergy Bhd (TRCS) and WCT Bhd by 2% to 17%, while trimming those of IJM Corp Bhd and Malaysian Resources Corp Bhd (MRCB) by 2% to 3%, having rolled forward the base year for valuation purposes from 2011 to 2012. We make no changes to our stock recommendations ' 'outperform' for Fajarbaru, HSLG and TRCS; 'trading buy' for MRCB; 'market perform' for Gamuda; and 'underperform' for IJM and WCT.
Risks include: (i) the government reverting to an austerity drive to rein in the budget deficit; (ii) potential hiccups in the rollout of public projects; and (iii) the less-than-robust overseas construction markets, particularly, the Gulf states.
We are neutral on the construction sector, but bullish on small caps. We see a bright spot in small-cap builders due to: (i) their ability to win key work packages of large-scale projects; (ii) their better chances of winning smaller contracts and subcontracts of large-scale projects; and (iii) their attractive valuations. Our top small-cap picks for the construction sector are Fajarbaru (fair value: RM1.80) and TRCS (FV: RM2.26). ' RHB Research, June 28
This article appeared in The Edge Financial Daily, June 29, 2011.
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