Results Highlights  

• Protasco's 3Q2017 net profit slipped 28.0% Y.o.Y to RM10.3 mln, dragged down by cost overrun on certain construction projects, lower contribution from the property development segment in absence of new launches and higher finance cost. Revenue for the quarter declined marginally by 0.5% Y.o.Y to RM301.2 mln, mainly on lower contribution from the property development segment. 
• For 9M2017, cumulative net profit sank 51.1% Y.o.Y to RM21.5 mln. Revenue for the period contracted 20.9% Y.o.Y to RM653.2 mln. The reported earnings only amounted to 62.3% of our 2017 earnings forecast of RM34.5 mln, whilst the reported revenue amounted to 78.1% of our full year estimate of RM836.5 mln. 
• Segmentally, the maintenance division's pretax profit jumped 110.6% Y.o.Y to RM18.8 min on higher topline growth due to increase in periodic works. Its trading division's pretax profit added 20.0% Y.o.Y to RM1.1 min on higher supply of building materials for the maintenance segment's periodic works. The engineering service segment's pretax profit surged 154.8x Y.o.Y to RM5.1 mln on increased in  engineering consultancy works.
• On the flipside, its construction segment reported a pretax loss of RM1.8 min vs. a pretax profit of RM0.9 min in the previous corresponding quarter, on cost overrun in certain infrastructure projects, coupled with completion of PPA1 M Phase 1 project. The property division's pretax profit sank 95.2% Y.o.Y to RM0.3 min in the absence of new launches. Following the drop in number of students (from 3,986 to 3,705), its education segment's pretax profit slumped 95.3% Y.o.Y to RM39,000. In the meantime, Protasco gearing declined to 0.4x (from 0.8x in 2Q2017). 

Prospects

We noted that Protasco did not secure any major construction contract in 2Q2017. Consequently, the group’s construction orderbook now only accounts to 58.1% of our estimated orderbook replenishment rate of RM300.0 mln for 2017. Nevertheless, we remain positive on the group’s construction prospects as Protasco is tendering for approximately RM5.00 bln worth of construction projects. Moving forward, Protasco will continue to capitalise on Budget 2018’s commitment to build more affordable housing projects, particularly under the 1Malaysia Civil Servants Housing Project (PPA1M) scheme, of which 25,000 units will be completed in 2018. With an unbilled construction orderbook of RM707.0 mln as of 30th September 2017, the aforementioned segment will be kept busy over the next two years.

In the meantime, we reckon that the concession segment will be well supported by an outstanding orderbook of RM4.02 bln (mainly from the maintenance of Federal roads in Pahang, Terengganu, Kelantan and Selangor) that provide earnings visibility until 2026. We also note the group is in negotiations with relevant authorities for the extension of the contract to maintain Federal roads in Sarawak that will expire in 1Q2018.

On the property development segment, Protasco have recently soft-launched 2 projects which are 2-3-storey shop office at Pasir Gudang in mid-September 2017 and the Telipot Apartment at Kota Bahru in end-November 2017. The combined gross development value of both projects stands at RM226.0 mln. Meanwhile, the group’s unsold units from De Centrum Unipark Phase 2, comprising of 20-storey condominiums (Block C & D) valued at RM31.0 mln will be recognised progressively upon the completion of sales.

Valuation and Recommendation

Although the reported earnings only make up to 62.3% of our results, we believe that earnings should pick up moving into 4Q2017, due to higher billings from the PPA1M Phase 2 project coupled with improved works from the concession division. Therefore, we made no changes to earnings forecast and we maintain our BUY recommendation with an unchanged target price of RM1.20.

We arrive 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 - 30 Nov 2017