SNC vs. TRC, a critical comparison.

Below is a letter I just wrote to the Investment Bankers of SNC (13.80), which is organising a massive road show next week in Bankgok. As you know SNC will be issuing a Public offering of 100 million new shares, about to be priced next week. Below I depict a bit on why, after some updated reflection, I still like TRC better. Members' keep posted here as any reply received by the SNC bankers will be posted below in the comment box.

This was an original member only article as exactly published on November 8 '07. On Feb 4th '08, we released for all to see.

I have a tentative appointment to meet with TRC's president on Friday November 16, and so welcome any questions.

Dear SNC Investment Bankers,

Last night I was reviewing recent research on TRC, as compared to SNC. Clearly two interesting choices at this time. TRC stands out more, or do you disagree?

TRC appears likely that it will get more impressive power plant projects as an EPC. (EPC covers process design, construction, equipement installation and commissioning.)

Petrochemical plan projects in addition to its lucrative on-going gas pipeline high margin captive market constructions. PTT has announced huge expansion plans on this... TRC expects to show a backlog of 2 Bill.Baht by year end....and soon TRC looks to secure a petrochemical plant project worth 800 mill. soon. Its targeting Bangpakong and Wangnoi power plants worth 6 Bill each...

In addition S.Zelan (51% owned) expects to secure construction work of at least one of the power plants from the IPP bidding. If any of this is successful, TRC is likely to show huge earnings growth for years to come. The company seems well placed to be successful on at least a number of those.

As I can determine the consensus EPS forecast for next year is around .55 to .60 Baht per share. Ms. Pongrat visited the company twice in recent months (we went together once) and now estimates the EPS for year 2008 at 0.60, or on the high range.

IF I take a p/e of 12 at the mid range, say EPS 0.57, the target price for TRC comes to around 6.80, or 38% higher then the current market price of 4.90. This is is more then double the potential appreciation when comparing your target price of 16 for SNC, which also assumes a p/e of 12 for next year. 13.8 SNC current price to the 16 level, is only a 15.9% appreciation. Clearly both companies have equally strong growth prospects going into year 2009, whereas SNC is a bit more dependent on global demand, now less in balance.

I realize SNC is a bigger company, will have more shares outstanding, and so likely higher trading liquidity. To balance this a bit, SNC will have more of its shares closely held, some 42%, post PO., vs. less for TRC.

SNC price to book ratio is double then TRC's....as SNC' book value is barely 3.20 vs. 2.20 for TRC and the 100 mill. new shares will dilute this some 33%. (OK, they are different companies but still, that is a huge difference). The expected dividend yield seems similar at both companies.

Surely SNC depends increasingly more on exports and with the US stagnating, and Japan not growing at all for years already...as is shown in the presentation OEM is likely to be 50% of SNC's business by year 2009.

The US could now well go the way Japan did many years ago...i.e. stagnate growth for some time until it works off its housing bubble. (And don't forget all those rich investors, many of whom are taking a bit high on CMO's bonds, many now in trouble. They are talking about a trillion dollar hit. Many rich Thai investor families whom divested there to not have all in Thailand, no doubt also are taking a hit on the currency and their housing bonds.)

Surely there are risks that SNC exports to the US and then EU, could be tamed down the road? AS the housing market in the US is in the doldrums and housing is a prime customer of new Air Con's. Is it not? And what if the Chinese dump their A/C's on the world market should their economy finally correct, post Olympic games? I am just pointing out possible risks, not being negative.

TRC on the other hand seems nearly assured that its core business will continue to grow fast, almost regardless of what happens to the US consumer/sub prime, falling US Dollar, high oil prices etc...The madness on commodity prices which is affecting copper metal as well, is a further (perhaps minor) risk, vs. TRC which lets most of its customers buy its own steel to make all those pipelines.

Perhaps I am getting carried away, or am missing something important? Of course I would more then welcome to be pointed out any fallacies, nuances or other mistakes I make with the above reasoning.

Look forward seeing you both again next week.

Best Regards,

Paul Renaud.

Thaistocks.com AG.