TRC Synergy - Wildcard coming true? (HLIB)

Price Target: RM2.00

Share price: RM1.76

News:

 The Brunei Economic Development Board (BEDB) announced that the Sultan of Brunei has consented to the establishment of a US$2.5bn oil refinery and aromatics cracker project located in Pulau Muara Besar (PMB). Zhejiang Hengyi Group Co will undertake this project and will be offering a Bruneian equity participation of up to 30%.

Comments:

 To recap, TRC’s 26% associate (74% is owned by TRC’s Brunei partner), PetroBru, has been pursuing this project since 2008 and developments for this project took a pause in Jun-09 after the detailed feasibility study was completed. This oil refinery is part of the overall PMB development and BEDB is targeting for PMB’s port facilities to be ready in 2013.

 Although PetroBru has yet to officially obtain the Bruneian equity stake for this venture, rough calculation on the size of this investment based on TRC’s effective stake of 7.8% is ~RM580m, representing 1.7x TRC’s market cap, which is larger than TRC itself.

 TRC may also have the upper hand in participating construction works for the refinery by virtue of its indirect holdings in this venture. The design and engineering scope for the refinery has been awarded to Sinopec and construction activities are expected to start after the conclusion of the detailed engineering study which is expected to take place over the next 12 months.

 Another bright spot for TRC is the infrastructure and land reclamation projects in PMB which is worth ~RM4.9bn. The size of the island is expected to expand from 950 ha to ~2,000 ha. TRC, with its decent track record stands a good chance in winning some contracts in PMB. Meanwhile, the company will be busy with their existing order book of RM1.2bn (see Figure #2), which translates to 3.2x FY10’s revenue.

 On a separate note, TRC’s ex-date for its 1-for-2 share split, followed by 1-for-5 bonus issue and 1-for-5 free warrants corporate exercise falls on 13 July (Wed).

Risks:

 1) Single project concentration risk in the LRT project; 2) political and regulatory risk (both local and overseas); 3) rising raw material prices; and 4) unexpected downturn in the construction sector.

Forecasts:

 Unchanged as it is still too early to impute any earnings from the oil refinery venture.

Rating:

 Maintain BUY as current order book provides clear earnings visibility and should show sequential earnings growth going forward. PMB could be an added bonus. Strong balance sheet with net cash of RM0.84/share.

Valuation:

 Target Price of RM2.00 based on 13x average FY11 and FY12 earnings maintained.