This article first appeared in The Edge Malaysia Weekly on February 25, 2019 - March 3, 2019

TRC Synergy Bhd could be a beneficiary of the Sarawak government’s allocation of RM9 billion to development expenditure in its 2019 budget, the highest in the state’s history. The small-cap construction player has a 20-year track record in the state.

The RM9 billion is expected to come from the state’s reserves, which stands at about RM31 billion, insulating the projects from the risk of a reduction in federal government spending. After the 14th general election, the Pakatan Harapan government reviewed some projects, causing a sell-down in construction players, especially those involved in infrastructure projects.

TRC Synergy was not spared. In fact, its share price fell 31.7% to a one-year low of 42 sen on June 5 last year as investors cut their exposure to the construction sector.

However, the stock has since rebounded, closing at 57.5 sen last Wednesday — not far from the 61.5 sen seen on May 8, a day before GE14 — as the federal government has said that it will honour all existing contracts for the RM29 billion Pan Borneo Highway project.

A senior member of TRC Synergy’s management tells The Edge that the group has tendered for some of the upcoming projects in Sarawak, including the RM11 billion coastal road project, RM6 billion trunk road project and RM8 billion water grid project.

He adds that the group’s Unit Pendaftaran Kontraktor licence — it is one of the few listed construction companies in Peninsular Malaysia to have one — gives it a competitive advantage in the bidding process.

“We did not jump into Sarawak just because of the opportunities there now. We have been there for about two decades. That shows our commitment to being part of the development over there,” the senior official says.

TRC Synergy bagged a RM498.7 million contract from Putrajaya Holdings Sdn Bhd, the master developer of Putrajaya, for an integrated development project at the end of last year, which increased its order book to RM3 billion. This will keep the company busy for the next three to four years with a burn rate of RM750 million to RM1 billion per year.

The senior official points out that the new project indicates that the group’s ability to win contracts remains intact under the new government. In fact, he believes that open tenders could give TRC Synergy a better chance of beating its competitors.

According to him, even without taking into consideration the upcoming projects in Sarawak, the group’s tender book stood at about RM2.6 billion, with most of the projects involving the construction of buildings and infrastructure works. Meanwhile, order book replenishment for FY2019 and FY2020 is likely to be maintained at about RM700 million, leading to earnings visibility for its construction segment.

Apart from that, the group’s long-awaited Ara Damansara mixed-use development — comprising serviced apartments, hotels, an office block and a retail mall — is in the last stages of finalisation. It is the first fully integrated transit-oriented development in Selangor with a gross development value (GDV) of RM1.1 billion. The launch of the project is slated for the second quarter of the year.

The development, located adjacent to the Ara Damansara LRT station, is a joint venture with Syarikat Prasarana Negara Bhd.

Banking on Australian projects in FY2019

TRC Synergy, which ventured Down Under 10 years ago with the buying of a third of Pretty Sally Holdings Pty Ltd — which has development rights to the 329-acre Springridge in Wallan, Victoria — is about to see its investment bear fruit this year.

Planning to build about 1,100 bungalows on the site — currently about 36% of the units have been sold — the developer is expecting to record the sale of 140 units in its financial year ending Dec 31, 2019 (FY2019). In Australia, earnings from a property development will only be recorded in the books upon its completion.

The remaining bungalows will keep the group busy for the next five years.

Pretty Sally Holdings also owns Australian homebuilder Hermitage Property Group, which is providing various construction packages for the development.

TRC Synergy believes Springridge provides a platform for the group to ride the rising popularity of residential subdivided lots outside Melbourne city, given the steep pricing within the city centre.

The group expanded its presence in Australia with the purchase of a development site in Richmond in 2011 to build its first hotel. In 2017, TRC Synergy signed a 12-year agreement with Starwood Australia Hotel Pty Ltd, an affiliate of Marriott International Inc under the brand name Element by Westin in Melbourne.

The senior official says the total development cost of the hotel, excluding land cost and bank interest, is about A$42 million. It is expected to commence operations in June. The completed market value, according to CBRE Australia, is expected to be A$64.5 million. It is worth noting that the average hotel occupancy rate in Melbourne in 2015 and 2016 stood at about 80%.

While it might be too early to expect the group to see a contribution from its hospitality segment, the senior official says it is likely to turn cash-flow positive by the end of the first year.

At 57.5 sen, TRC Synergy is trading at a trailing price-earnings ratio (PER) of about 14 times and a dividend yield of about 5%. In FY2017 and FY2018, the group had dividend payout ratios of more than 30% at 1.9 sen per share and 2.8 sen per share respectively. With a net cash position, the group is well positioned to bid for projects in the future.

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