TRC, the strongest buy opinion/view in place.
TRC Very Strong Buy view in place!
I have reviewed TRC (4.96) elsewhere and so here will try not to rehash old research notes/information on this key choice going into year 2008.
Over the past 6 months I made it very clear that TRC retains the strong-buy view here in my opinion -and this despite the 60%+ stock price appreciation since first pounding the table on this key selection around 3 Baht earlier this year. It is noteworthy that during the month of November, and despite the SET market dire sell-off, TRC is higher in price today then back in late October, when the Thai SET index was flirting above 900.
Based on what I was told TRC’s new 700-800 million Baht Bio Diesel project is in the bag and so the back log will soon be boosted to near 1.8 Bill. Baht, from the currently stated 1.08 Bill baht backlog. And there is more to come. Lets face it, the gas pipeline construction business is a captive & supplier favored market here, as huge expansion plans are firmly in place, no matter what happens to the US consumer, oil prices, the dollar, US subprime loans, Thai elections etc.
TRC is very well connected to PTT and net profit margins in this business are much higher the normal construction business.
TRC also has huge potential in water supply management both here and in the region. This company is very well positioned to, besides gas pipelines’, source huge new business in power plant & petrochemical projects, water desalination and water distribution, water pipelines. Water pipelines is even more difficult to construct due pressure and much higher weight.
Just as one example, TRC has been doing joint projects with the like CPP, a subsidiary of CNPC (China National Petroleum Corporation, see just below).
“CPP-TRC joint venture under the agreement dated January 24, 2005, to operate the construction in the Wangnoi-Kaengkoi natural gas pipeline project with the project value of Baht 2,100 million CPP will be the leader of the project. The proportion in the joint venture is CPP 90% and TRC 10%. “
As stated, TRC is very well connected with PTT (the SET largest listed company by market capitalization) which has huge expansion plans over the next few years. TRC is direct beneficiary of these entrenched multibillion Baht capital investment plans.
The biggest “whose who” in Thailand feature among TRC customers besides PTT is ATC, TCO, TCP TPI, TCL and EGAT. It is noteworthy that TRC has an outstanding “on time” delivery track record.
Again for more information on TRC and what they all do, see their web site at: www.trc-con.com
And for a recent company presentation of last August '07, see this link: http://www.mai.or.th/resources/ir/TRC_E_200709111117110229.pdf
The earlier this year, 99% acquisition of Sahakarn Wisavakorn by TRC, so now places TRC as a premier specialized contractor with 5 decades long experience besides all proper government licenses to undertake just about any project (rated #1st rank and specialized rank). This acquisition was made with issuing new shares so there was no debt incurred. TRC’s D/E ratio is currently at a reasonable 1.2 and TRC updated book value is shown at 2.28, increasing from 1.65 last year. Post this purchase, there are now a total of 256 million shares outstanding for TRC with a PAR value of 1. TRC's balance sheet shows no interest expense.
Zelan Holding (a Malaysian listed company and also a power plant construction specialist) is besides an experience property developer, with global reach. Together with Sahakan (51% / 49% partnership) they are most likely to secure the building of the Rachaploen project (they own the land already). This is a to be 50 storey building at a very attractive location. The company will pre-sell all before building and so realize a handsome premium estimated at 200 million Baht and a project management fee (estimated at 80 mill. Baht) and some 4 billion Baht in revenue from the construction. Even at a low 3-5% profit margin this could be an additional 70-80 million Baht in net profit to TRC, in say a year or 2. Remember this is a joint project with Zelan Holding, a company with much experience in this.
TRC, post the acquisition, now has a market cap of 1.2 Bill. Baht, or around 35 million US$, but unlike some other smaller cap MAI listed stocks, TRC trades relatively well. My tabulation showed an average daily trading volume of 28.4 million Bath per day, average over the past 90 days, or around 850,000 US$. This makes TRC one of the most actively traded stocks on the MAI index. And yet its 2007 p/e at a market price of 4.96 currently is at an undemanding 10, as I believe TRC can earn some 110 mill Baht this year. For the cummulative 9 months to date, the EPS is at 0.39 per share and the net profit is shown at 81.9 mill Baht. The ROE is around a solid 22% per year and has been increasing of late. TRC has a favorable income tax rate of only 20% due to its listing on the MAI, this is extended to year 2010.
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On the day I visited TRC in mid November, the usual analyst that covers TRC from Bualuang Securities was supposed to come along. An always critical analyst, she nevertheless has been a recent big fan of this company.
Some 2 months ago she told me (on another company visit) that she “likes TRC more then any other stock pick currently….and would love to do an international road show with them”. I am the one who back in June '07, went to see TRC company with this analyst, yes on my picking.
This same analyst visited the company again in late October without me and promptly upgraded her earnings estimates from 0.56 EPS projected for next year to 0.60. She confirmed in a telephone conversation to me thereafter that she remained highly bullish, hence the most recent earnings upgrade. We both noted how TRC does not have much risk at all on steel price increases due to the policy of customers sources this.
On the day in mid November we were supposed to visit TRC she called-in sick at the last minute -and they sent another analyst along. A bank analyst who knew near nothing about TRC. Odd, as just the day before, at 5 PM, I spoke for 30 minutes to her and she was exited about our visit the next day.
During our 1 12/ hour visit TRC senior management was upbeat besides straightforward. We were told that the earnings estimates for next year by brokers were too conservative -and that TRC could earn some 250 mill Baht next year.
At one point stating that 1 Baht per share seems entirely probable, which would mean 256 mill Baht, as there are 256 mill. Shares outstanding! This was most revealing as broker estimates are currently only around half of this for year 2008.
This statement was supported with huge projects coming in the pipeline and some already secured like the Bio Diesel project. Huge water management projects, water pipelines for Thailand and a water dam for Cambodia and other new business ventures are highly likely next year and beyond. I viewed the meeting as sanguine and down to earth and did not have a feeling of being sold or boosting statements. All along the senior finance manager was present and I must say I have a good feeling about it all. I think analyst most report what management tells them with a grain of salt and not "play God" in between. Unless there has been reason in the past to be suspect.
I came away upping my estimate from around 0.60 Baht per share to say as high as 0.95 for next year (conservative and less then what I was told) valuating this company with a p/e of 5.2 for next year. Since year 2008 is just around the corner, since this company is a leader in a captive business, has a clean balance sheet and its shares trade relatively better then many other smaller cap’’s, I promptly re-stated my strong buy view and so expressed this to all members through an e-mail. That day, I told you I was exited and could not sleep.
Yet 1 day later the analyst whom covers TRC for Bualuang downgraded the rating to a hold with a price objective of 4.50, stating something in the Thai language that as the TRC announces its new projects which will consider upgrading.
Then just this morning at 9:30 AM, as I finish this report and not even 2 weeks later, the same Bualuang analyst now comes out with a new buy view on TRC and a price objective of 10.80! You go figure. She now has an earnings estimate of 0.90 Baht next year. Welcome to reality Ms.Pongrat -and what was all that about?
Checking on insider transactions today does not show any significant changes, except for a huge buy of 4 million shares last May at 3 Baht per share, by the CEO whom I interviewed.
Best Regards to all Members,
Paul A. Renaud.
