Results Highlights

Protasco’s 2Q2016 net profit contracted 19.1% Y.o.Y to RM14.4 mln, dragged down by the weakness in both its maintenance and property development segments, coupled with the higher effective tax rate of 35.7% (vs. 28.3% reported in 2015) which offsets the stronger earnings from the construction segment. Revenue for the quarter, however, gained 27.6% Y.o.Y to RM396.2 mln.

For 1H2016, cumulative net profit slipped 10.2% Y.o.Y to RM27.7 mln. Revenue for the period was marginally lower by 1.2% Y.o.Y to RM523.3 mln. Both the reported earnings and revenue only amounted to 39.6% and 40.4% of our previous full year net profit and revenue forecast of RM70.0 mln and RM1.30 bln respectively.

Segmentally, the maintenance division’s 2Q2016 pretax profit fell 22.8% Y.o.Y to RM14.8 mln, after the seven-year state road maintenance contract for Selangor ended in September 2015. The construction segment’s pretax profit, however, jumped 97.8% Y.o.Y to RM13.7 mln on higher recognition from Phase 1 of the PPA1M project, which is at 86% completion.

Its property development segment’s pretax profit, meanwhile, sank 89.6% Y.o.Y to RM0.5 mln on the completion of Phase 1 of De Centrum project, whilst Phase 2A is only at 68% completion. The engineering services’ segment pretax profit gained 37.7% Y.o.Y to RM1.2 mln, while the trading & manufacturing segment’s pretax profit climbed 21.1% Y.o.Y to RM0.8 mln on lower operational costs. The education segment’s pretax profit plunged 95.2% Y.o.Y to RM35,000 due to lower enrolment of new students during the new intake.

Prospects

Although Protasco did not secure any major construction contracts in 1H2016, the recent contract award at the beginning of August 2016 for works for the Sungai Besi-Ulu Kelang Expressway valued at RM315.8 mln boosted the company’s outstanding construction orderbook to approximately RM904.0 mln (implying a relatively high 3.6x construction orderbook cover ratio vs. 2015’s construction revenue), which will continue to anchor the segment’s earnings growth until February 2019, backed by two relatively large scale PPA1M projects. Going forward, Protasco will be leveraging on the government’s plans to build up to 100,000 PPA1M housing units by 2018, of which 82,012 units have already been approved.

Protasco has also renewed the 10-year Federal Road maintenance contract, collectively covering 7,104 km of roads in Selangor, Pahang, Kelantan and Terengganu in 1Q2016. Although the group has not received any notification on the renewal of the maintenance contract for the State Roads in Terengganu that expired in July 2016, we think the concession segment is already well supported by an outstanding orderbook of approximately RM4.40 bln which will provide earnings visibility over the next ten years. Meanwhile, Protasco is currently tendering for construction and concession contracts worth collectively RM5.00 bln to sustain its long term earnings growth.

On its property development segment, the unbilled sales of RM30.0 mln will be recognised progressively towards the end of 2016. Going forward, Phase 2B of DeCentrum, which carries a GDV of RM350.0 mln, is slated for launch in 2H2016, subject to the general property market condition. Meanwhile, the company’s education unit, Infrastructure University Kuala Lumpur (IUKL) saw the number of student population increased to 3,744 students as of 30th June 2016 (from 3,284 students in 1Q2016).

Valuation And Recommendation

With the reported earnings coming below our forecast, we trimmed our earnings estimates for 2016 and 2017 by 22.2% and 23.8% to RM54.4 mln and RM57.7 mln respectively, after adjusting our earnings forecast to account for the weaker maintenance segment, coupled with the higher effective tax rate. We, however, maintain our BUY recommendation on Protasco with a lower target price RM2.10 (from RM2.40). At the target price of RM2.10, Protasco will be trading at prospective PERs of 13.0x and 12.3x in 2016 and 2017 respectively, which is close to the construction industry average of 11.0x-13.0x.

Our target price is derived from ascribing an unchanged target PER of 11.0x to its 2016 construction earnings, a target PER of 8.0x (unchanged) to its concession and engineering services’ earnings, while its education and trading earnings remain pegged at target PERs of 6.0x respectively due to their smaller scale businesses. Its property development division’s valuation remains unchanged at 0.6x of its BV.

Risks to our forecast and target price include failure to achieve the targeted construction orderbook replenishment amount and failure or delay in concession contract renewals. Further tightening of monetary policies will also be unfavourable to its property development business.

Source: M+ Online Research - 23 Aug 2016