Results Highlights

• Protasco’s 1Q2017 performance was a disappointment after its net profit declined 75.4% Y.o.Y to just RM3.3 mln, which amounted to only 8.1% of our previous forecast with lower contributions from most of its business segments, while its property division registered a loss. Its revenue, however, rose slightly by 4.0% to RM132.2 mln, helped by higher contributions from its engineering and education divisions to offset the lower contributions from other divisions.

• Segmentally, the maintenance division’s pretax profit fell 51.5% Y.o.Y following the non-renewal of its road maintenance contract in 2016, while the slower work progress on some of its existing concessions also affected its earnings. Its construction arm, however, posted an improvement in its pretax profit (+5.9% Y.o.Y) despite the completion of the PPA1M Phase 1 project on improved pretax margins of 7.0% vs. 5.0% in the previous corresponding period. Meanwhile, its engineering division’s pretax profit saw its pretax profit slipping 60.8% Y.o.Y as the division incurred higher cost.

• Its property division recorded a pretax loss of nearly RM1.0 mln following the completion of all its property projects and deferment of its new property launches due to the weak market sentiments, while its trading division’s earnings were stable, contributing a pretax profit of about RM0.7 mln. Its education unit’s earnings, however, were lower.

Prospects

Although its first quarter performance is typically slower than the other quarters, Protasco’s prospects for the remainder of the year is likely to stay relatively indifferent as its maintenance and property units’ performances are likely to stay muted due to slower work flow and still tepid demand for properties. As it is, its maintenance unit is seeing fewer jobs amid the lower government spending and while we expect more jobs flow over the coming months, we think the improvements will be modest. Notwithstanding a potentially slower 2017, the division’s earnings should be well supported by its RM4.0 bln concession contract that will ensure sustained long term earnings where we expect the job orders to pick-up pace in 2018.

Meanwhile, with its property launches delayed due to the insipid property market, there will be little contributions over the next 12 months with contributions only from its jointventure project in Kota Baru, Kelantan and potentially from a small commercial development in Pasir Gudang, Johor.

Its construction arm is expected to commence construction of the Second Phase of the PPA1M project later this year and could provide some buffer to its construction earnings, but contributions from the project will be minuscule in 2017 until the project gathers pace in 2018. With an estimated construction orderbook of nearly RM450 mln, its construction arm will remain occupied over the next two years. Meanwhile, the group is also bidding for new construction projects worth some RM4.0 bln to replenish its orderbook and given the plethora of upcoming infrastructure projects, its orderbook replenishment prospects appears firm.

Valuation and Recommendation

Following the weaker-than-expected 1Q2017 results, we have trimmed our earnings forecast further for 2017 and 2018 by 35.7% and 9.0% respectively, after lowering our maintenance concession work flow and property sales assumptions. This translates to higher PERs of 15.1x and 8.6x for 2017 and 2018 respectively, but we maintain our BUY recommendation with a lower target price of RM1.25 (from RM1.45). Although its earnings forecast are lowered for the next two years and its PERs already at the upper end of its peer averages, we think its recent share price decline has already reflected the weaker prospects for 2017. At the same time, there is also a decent earnings recovery in 2018 to as some of its delayed projects gets off the ground that should lend support to the growth.

We continue to arrive at our target price on a sum-of-parts basis by ascribing an unchanged target PER of 11.0x to its 2017 construction earnings as well as a target PER of 8.0x (unchanged) to its 2017 concession and engineering services’ earnings. Its education and trading units valuations remain pegged at target PERs of 6.0x respectively due to their smaller scale businesses, while its property development division’s valuation is from ascribing an unchanged at 0.6x of its BV.

Risks to our forecast and target price include inability to attain 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 - 29 May 2017