Results Highlights

• Protasco’s 2Q2017 net profit contracted 45.0% Y.o.Y to RM7.9 mln on lower contributions from its two core business. Revenue for the quarter slipped 44.5% Y.o.Y to RM219.8 mln mainly on slower construction works and deferment of property launches in view of the soft property market.

• For 1H2017, cumulative net profit slumped 59.6% Y.o.Y to RM11.2 mln. Revenue for the period decreased 32.8% Y.o.Y to RM351.9 mln. Both the reported earnings and revenue only amounted to 28.1% and 36.1% of our previous forecast of RM39.8 mln and RM974.6 mln respectively.

• Segmentally, the maintenance division’s pretax profit declined 27.7% Y.o.Y to RM10.7 mln following the non-renewal of its road maintenance contract in 2016 and delay in periodic works. Its construction arm’s pretax profit sank 93.2% Y.o.Y to RM0.9 mln on cost overrun in certain infrastructure projects, coupled with delay commencement of the relatively large scale PPA1M Phase 2 project. Its trading division’s pretax profit slipped 60.6% Y.o.Y to RM0.3 mln on lower periodic works. Following the drop in number of students (from 3,744 to 3,504), its education segment’s pretax profit fell 17.1% Y.o.Y to RM29,000.

• On brighter note, the property division’s pretax profit jumped 8.1x to RM4.3 mln on reversal of development expenditure from previous completed projects. The engineering service segment’s pretax profit added 87.5% Y.o.Y to RM2.2 mln on additional pavement evaluation works. In the meantime, Protasco gearing declined to 0.8x (from 1.3x in 1Q2017).

Prospects

After a muted 1Q2017, Protasco has secured a major construction contract worth RM174.4 mln in 2Q2017. The group’s orderbook replenishment now amounts to 58.1% of our estimated orderbook replenishment rate of RM300.0 mln for 2017. With a construction orderbook of about RM719.0 mln as of 30th June 2017, its construction arm will remain occupied over the next two years, mainly on the construction of the Sungai Besi-Ulu Kelang Expressway (SUKE) and PPA1M public housing projects. Meanwhile, the group is also bidding for new construction projects worth some RM5.00 bln, comprising of building, housing, highway and infrastructure projects. We expect job orders to pick-up pace in 2H2017, premised to a plethora of mega infrastructure projects in the pipeline.

On the road maintenance segment, Protasco is actively bidding for long-term road maintenance contracts for State, rural and municipal roads worth approximately RM1.00 bln. The group will also capitalise on the RM4.60 bln allocation to maintain state roads under Budget 2017. Moving forward, we think that contribution from the aforementioned segment will continue to anchor the group’s earnings, backed by an outstanding orderbook of RM4.10 bln that will keep them busy over the next ten years.

On the property development segment, Protasco aims to launch two projects in 2H2017, namely: (i) 66 units of 2-storey shop office in Pasir Gudang with a GDV of RM66.0 mln, and (ii) 583 units of Telipot Apartment complex in Kota Bahru that carries a GDV of RM160.0 mln – the latter via a joint venture with Kelantan State Government (40.0%). On the ongoing large scale property project De Centrum, unsold units in Phase 2A (Block C & D) stood at RM111.0 mln and earnings will be recognised progressively upon completion of sales as the group is aggressively embarking on road shows to promote the project.

Valuation and Recommendation

Following the weaker-than-expected 2Q2017 results, we trimmed our earnings forecast for 2017 and 2018 by 13.3% and 12.1% respectively, after lowering our maintenance concession work flow assumptions and slower progress in its construction activities. However, we maintain our BUY recommendation with a lower target price of RM1.20 (from RM1.25). We believe the group’s earnings should recover moving into 2H2017 and 2018, premised on the acceleration of the execution in several construction contracts, improved works from the concession division and new property development launches in 2H2017..

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 2018 construction earnings as well as a target PER of 8.0x (unchanged) to its 2018 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 0.6x to its BV.

Risks to our forecast and target price include inability to attain the targeted construction orderbook replenishment amount, delays 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 Aug 2017