Results Highlights

• Protasco’s 1Q2018 net loss stood at RM2.1 mln vs. a net profit of RM3.3 mln in the previous corresponding quarter, dragged down by losses in the construction, property development and education segments, coupled with higher finance cost. Revenue for the quarter, however, added 19.1% Y.o.Y to RM157.5 mln.

• The reported earnings fell short of our previous 2018 net earnings forecast of RM37.4 mln, whilst the reported revenue also came below our expectations, amounting to only 15.6% of our full year estimate of RM1.01 bln.

• Segmentally, the maintenance division’s pretax profit jumped 111.9% Y.o.Y to RM10.2 mln on the back of increases in periodic works awarded in July 2017. The engineering services segment’s pretax profit surged 238.7% Y.o.Y to RM0.6 mln on higher billings from consultancy services projects.

• In contrast, the trading and manufacturing segment’s pretax profit fell 47.9% Y.o.Y to RM0.4 mln on lower profit margin for bitumen and cold mix products amid the increase in petroleum prices. The construction segment recorded a pretax loss of RM1.3 mln vs. a pretax profit of RM5.1 mln in the previous corresponding quarter due to slow progress of the PPA1M Phase 2 project. The education segment also registered a pretax loss of RM1.6 mln vs. a pretax profit of RM6,000 in the previous corresponding quarter on lower number of students intake, while the property development segment remains in the red with a pretax loss of RM2.6 mln in absence of new launches in 2017.

Prospects

It was a relatively quiet period for Protasco in 1Q2018 in absence of new construction job wins. Albeit that, its’ outstanding construction orderbook of RM1.07 bln, translating to a cover ratio of 6.0x of 2017’s construction revenue of RM176.9 mln, will provide earnings visibility over the next two-to-three years. For 2018, we have trimmed our construction orderbook replenishment to RM150.0 mln (from RM300.0 mln) from a construction tenderbook of approximately RM2.00 bln (down from RM5.00 bln in the previous quarter) in view of potential delays in the awards of certain projects amid the uncertainties surrounding the new government’s policy on infrastructure projects.

On the other hand, the maintenance segment with an outstanding orderbook of approximately RM4.95 bln (inclusive of the maintenance of Federal roads in Selangor, Pahang, Terengganu and Kelantan, agricultural roads in Perak and State roads in Perak – all renewed in April 2018) will see earnings visibility until February 2028. Moving forward, Protaso will also continue to actively bid for new road maintenance projects.

As of 1Q2018, the group’s unsold property stocks amounts to approximately RM30.0 mln, predominately on De Centrum Unipark Phase 2 project – comprising of 20-storey condominiums (Block C & D) that will be recognised upon completion of sales. Moving forward, the group is planning to launch affordable apartments – Telipot Apartment, in Kota Bahru with a GDV of RM160.0 mln in June 2018.

Valuation and Recommendation

With the reported earnings coming below our estimates, we slashed our earnings forecast by 22.5% and 13.4% to RM29.0 mln and RM32.4 mln for 2018 and 2019 respectively to reflect the lower construction orderbook replenishment and slower execution in the construction segment. However, we maintain our HOLD recommendation on Protasco with a lower target price at RM0.62 (from RM1.10).

We arrive our target price on a sum-of-parts basis by ascribing a lower target PER of 8.0x (from 11.0x) to its 2018 fully diluted construction earnings due to the uncertainty surrounding the general construction sector as well as a target PER of 8.0x (unchanged) to its fully diluted 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 derived 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 - 31 May 2018