Results Highlights

• Protasco’s 4Q2016 net profit slumped 88.5% Y.o.Y to RM2.4 mln due to lower contribution from Phase 1 of the PPA1M project which is at the tail-end of its construction, the delay of two state maintenance contract renewal and lower recognition of its property development segment after Phase 1 of De Centrum is fully completed. Revenue for the quarter declined 44.3% Y.o.Y to RM262.9 mln.

• For 2016, cumulative net profit fell 33.5% Y.o.Y to RM44.4 mln. Revenue for the period year was lower by 16.6% Y.o.Y to RM1.09 bln. The reported earnings came below our expectations, accounting to only 76.8% of our full year net profit forecast of RM57.8 mln. The reported revenue, meanwhile, amounted to 96.7% of our previous revenue forecast of RM1.13 bln.

• Segmentally, the maintenance division’s 4Q2016 pretax profit sank 85.7% Y.o.Y to RM2.4 mln on the late renewal of two state roads maintenance contracts. The construction segment’s pretax profit declined 56.5% Y.o.Y to RM7.0 mln on lower recognition from the PPA1M Phase 1 project which was at its tail-end. Its property development segment pretax loss stood at RM3.4 mln vs. a pretax profit of RM3.0 in the previous corresponding quarter as De Centrum Phase 2A was completed.

• The engineering services’ segment pretax profit stood at RM3.01 mln vs. a pretax loss of RM0.5 mln on higher data collection works. The trading & manufacturing segment’s pretax profit climbed 22.4% Y.o.Y to RM1.1 mln on higher demand of quarry and bitumen products, while the education segment’s pretax profit fell 36.7% Y.o.Y to RM0.7 mln

Prospects

Despite not having secured any major construction projects in 4Q2016, Protasco’s outstanding construction orderbook of approximately RM721.0 mln as of 31st December 2016 (implying a 1.8x construction orderbook cover ratio vs. 2016’s construction revenue of RM40.7 mln), will continue to anchor the segment’s earnings growth over the next two years, backed by a relatively large scale PPA1M project that is delayed by land matters. Moving forward, Protasco aims to beef up its orderbook through tendering for RM4.00 bln worth of projects involving both large scale infrastructure and road projects.

Meanwhile, Protasco has clinched the maintenance work for agricultural roads in Perak state for a two year period for RM90.1 mln in February 2017. We expect the concession segment to remain well supported by an outstanding orderbook of approximately RM4.20 bln which will provide earnings visibility over the next ten years. We also note that Protasco is tendering for over RM1.0 bln worth of roadworks, including rural and municipal roads. .

Over at the property development segment, the unsold units amounting to RM115.0 mln will be recognised from 80 units of duplex for sale, which was converted from student hostels previously. Going forward, Protasco targets to launch three projects (two affordable housing projects and one commercial project) with a combined gross development value (GDV) of approximately RM880.0 mln in 2017.

We reckon that Protasco’s earnings growth in 2017 may remain subdued due to: (i) delay in projects execution for both PPA1M Phase 2 (waiting for the completion of land transfer from authorities) and SUKE projects (design and permit issues by Prolintas), and (ii) sluggish property market which saw no new launches in 2016 by the group. Nevertheless, the concession segment will recover from the renewal of two road projects, coupled with contribution from the newly secured agricultural roads maintenance contracts in Perak.

Valuation And Recommendation

As the reported earnings came below our forecast, we trimmed our earnings estimates for 2017 and 2018 by 21.0% and 11.0% to RM42.6 mln and RM52.6 mln respectively, after adjusting our earnings forecast to account for higher finance cost arising from the higher borrowings, lower contribution from construction segment amid several project deferments and sluggish property development sales. Nevertheless, we maintain our BUY recommendation on Protasco, but with a lower target price RM1.50 (from RM1.75). We think at the current share price of RM1.17, Protasco’s PER valuations at 11.6x and 9.4x for 2017 and 2018 remains attractive vs. the construction industry average of 11.0x-13.0x. We also expect its earnings recovery to strengthen in 2018 as some of its delayed projects gets off the ground.

Our target price is derived by assigning and unchanged target PER of 11.0x to its revised 2017 construction earnings, a target PER of 8.0x unchanged) to its revised 2017 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, 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.

Source: Mplus Research - 28 Feb 2017