30 May 2017 - Construction and property company Protasco Bhd had delivered disappointing results the last 2 quarters. With tight cash flow and lower profit margin across all sectors, had sent the share price tanks to 52 weeks low of RM0.95. Melacca Securities revised price target down 3 days after a downgrade.

Institutions and retail investors had sold down recently, despite Protasco good dividend payout, which doesn't match investors capital loss. The high gearing which saw Protasco alarming bank borrowing to raise money for higher operating cost and dividends payout gave negative signals to investors instead. Such cash payout in a rush seems to benefit substantial shareholders the most, as if the cash went for their personal needs is more important rather than to keep liquidity for business operation. Market in general perceive share price doesn't bother substantial shareholders as they control the company, but it's significant pain (in capital loss) for minority investors.

In wake of serious financial and operational governance issue, including the variance between public information and actual cash flow as published through press releases and research reports, the unclear road concessions scope of work, and sophisticated cash flows arrangement, had spooked research house Melacca Securities. The research house had recently downgraded their position from BUY to HOLD on 26 May 2017, and on 29 May 2017 quickly revised to BUY at lower price target of RM1.25, probably further adjusted their research numbers to play catch up. However, question remain on how shall the company turn around the low margin and cash intensive construction sector, and justify high P/E ratio, remains a black hole spiral in coming 12 months.

A quick look into Melacca Securities track record can find that Protasco had been telling the public good prospects, despite knowing that their loss of concession contracts back in year 2014, and replacement contracts with high order book but significantly lower margins as early as year 2015 will cut their bottom lone significantly. What the management had told the public since year 2015-2016 of promising property development income is technically flopped. Melacca Securities was told on February 2017 with misleading information, where actual numbers were concealed and cover up by interest parties to paint rosy prospects, therefore given a price target of RM1.75 with a buy call at RM1.22 looks foolish 3 months later. After 5 revised calls, latest buy call is at RM0.975 with target price of RM1.25, a significant miss information and unfortunate event for followers who bought on RM1.22 buy call earlier. 

Melacca Securities had also commented “Risks to our forecast and target price include inability to attain the targeted construction order book replenishment amount, delay in project completion and failure or delay in concession contract renewals. Further tightening of monetary policies will also be unfavourable to its property development business.”

With poor cash flow, and management openly told that any liquidity likely to churn back into PPA1M phase 2, and no new sizable concession at sight in the next 12 months, even with a high hope of P/E 15x for year 2017, Protasco price target looks over optimistic. With Protasco track record and culture of releasing over promising public information and well cover up of information for more than 6 quarters, how far can they publish their story through research houses would be tested in the next 12 months. Until proven correct, investors likely to remain sideline.

Summary:

Perhaps Melacca shall conduct more detail analysis in cash flows, to justify how can the company turn around next 12 months to give higher profit margins to sustain the P/E of 15x, while industry is averaging below P/E 11x. As for last 2 quarters results, annualised based on existing contracts, year 2017 would likely delivers RM18mil-RM21mil net profit, at P/E 11x would fetch RM0.45-RM0.55 down to earth valuation at most. However, if taking into consideration the futuristic PPA1M income that might double up the profits, and hyper inflating the P/E to 15x, share price might indeed fetch RM1.05-RM1.25. Anything above that, such as futuristic income from PPA1M phase 2, might able to camouflage and roll over net profit on book for another 1-2 years, but doesn't justify fundamentally especially cash recoverability, but looks good on account is all investors wanted to believe. As for dividend believers, year 2017-2018 would expect more borrowings to catch up with higher operational cost and most importantly, dividend. Perhaps those who got stuck at high price calls, shall keep the shares in cold storage and wait for dividend instead. Hopefully years later would recover the capital loss incured, or perhaps EPF will buy up all the shares and take control of the company, given the long history of government linked relationship planted by former owners of Protasco Bhd. That is another hidden value beyond fundamental.

FiNews

Date	Open Price	Target Price	Upside/Downside	Price Call	Source	News
29/05/2017	0.975	1.25	+0.275 (28.21%)	BUY	Malacca Securities
26/05/2017	0.97	1.45	+0.48 (49.48%)	HOLD	Malacca Securities
12/04/2017	1.10	1.45	+0.35 (31.82%)	BUY	Malacca Securities
28/02/2017	1.11	1.75	+0.64 (57.66%)	BUY	Malacca Securities
20/02/2017	1.22	1.75	+0.53 (43.44%)	BUY	Malacca Securities

Source: Melacca Securities