Maintain OVERWEIGHT on construction. We think that the impending LRT award is a prelude to more mega contract flows. In our recent Strategy report, we highlighted the possibility of an early General Election in 2011, possibly in 1H (see Further Election Indicators dated 25 Oct). As such, we expect the momentum of positive news within the sector to accelerate in the coming months and rerate our valuations upwards. Our top pick is Sunway (BUY, TP: RM2.52) and for the small caps, we like Ahmad Zaki (BUY, TP: RM1.45). For MRT play, we recommend Gamuda (TRADING BUY, TP: RM4.31) and for the LRT, investors should look at TRC (NR). We also recommend Naim (BUY, TP: RM5.10) as a proxy to the Sarawak state election theme.
Trading target of RM2.03. Given its currently meager orderbook, we expect earnings to contract 25.5% this year to RM20.3m. However, in view of our optimism on TRC’s potential contracts flow, we project a 31.4% earnings growth for FY11 and 16.7% for FY12. The key assumptions underlying our forecasts include
(i) RM500m p.a. new job wins for FY11-12, and
(ii) gross construction margins of 12%-13%.
For FY10, we assume TRC will bag RM200m worth of new jobs, of which RM152m has been secured YTD. In deriving our RM2.03 TP, we have ascribed:
(i) a 10x multiplier to its mid-CY11 earnings (lower end of our target PER for small cap contractors), and
(ii) added to this its net cash of RM0.79/ share.
As TRC is not under our regular coverage, we have a NOT RATED call on the stock. ( apa u cakap??)
