Results Highlights

• Protasco’s 2Q2018 net loss stood at RM1.0 mln vs. a net profit of RM7.9 mln in the previous corresponding quarter, dragged down by the weakness in five of-the six business segments. Revenue for the quarter, however, added 10.2% Y.o.Y to RM242.2 mln.

• For 1H2018, cumulative net loss stood at RM6.1 mln vs. a net profit of RM44.2 mln recorded in the previous corresponding period. Revenue for the quarter, however, rose 13.6% Y.o.Y to RM399.7 mln. The reported earnings fell short of our previous 2018 net earnings forecast of RM26.9 mln, whilst the reported revenue also came below our expectations, amounting to only 39.7% of our full year estimate of RM1.01 bln.

• Segmentally, the maintenance segment’s pretax profit fell 28.5% Y.o.Y to RM7.7 mln due to higher operating expenses that offset the topline improvement. The construction segment’s pretax loss stood at RM0.2 mln vs. a pretax profit of RM0.9 mln recorded in the previous corresponding quarter as the construction of PPA1M Phase 2 is still at initial stage and will only speed up in subsequent quarters.

• The property development’s pretax loss stood at RM2.2 mln vs. a net profit of RM4.3 mln in the previous corresponding quarter in absence of new launches. The engineering services’ pretax profit sank 91.2% Y.o.Y to RM0.2 mln on lower pavement works, while the education segment’s pretax loss stood at RM2.0 mln vs. a pretax net profit of RM29,000 in the previous corresponding quarter on a decline in number of student population. The trading & manufacturing pretax profit, however, jumped 208.7% Y.o.Y to RM1.0 mln on higher topline growth.

Prospects

Once again, Protasco was unable to secure any major construction contracts in 2Q2018 as mega-infrastructure and government-related projects were put on hold over the past couple of months. Protasco is tendering for some RM2.00 bln worth of construction projects, including affordable civil servant housings, building and infrastructure projects. Moving forward, Protasco’s outstanding orderbook RM1.06 bln will sustain earnings over the next three years. However, we expect the general construction sector to remain relatively quiet at least until the tabling of Budget 2019 on 2nd November 2019.

On a positive note, Protasco have secured the renewal of maintenance for Federal roads in Selangor, Pahang, Terengganu and Kelantan, agricultural roads in Perak and State roads in Perak in April 2018. The maintenance segment’s outstanding orderbook of approximately RM4.80 bln will continue to provide long term earnings visibility until February 2028. Moving forward, the group will actively bid for maintenance for building and road works.

As of 2Q2018, the group’s unsold property stocks amounts to approximately RM30.0 mln, predominately on De Centrum Unipark Phase 2 project. We also note that Protasco has launched Sentrio Business Centre with a GDV of RM66.0 mln and D'Perdana Telipot with a GDV of RM160.0 mln in July and August 2018 respectively.

Valuation and Recommendation

With the reported earnings coming below our estimates, we slashed our earnings forecast by 30.4% and 11.5% to RM20.2 mln and RM25.7 mln for 2018 and 2019 respectively to reflect the slower execution in both the construction and maintenance segments. We also maintain our HOLD recommendation on Protasco, but with a lower target price at RM0.50 (from RM0.62). We expect Protasco’s earnings recovery to be anchored mainly from its bread and butter business in 2H2018 - construction and maintenance segments that possess solid unbilled orderbooks.

We arrive our target price on a sum-of-parts basis by ascribing an unchanged target PER of 8.0x to its 2019 fully diluted construction earnings due to the lingering uncertainties surrounding the general construction sector as well as a target PER of 8.0x (unchanged) to its fully diluted 2019 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 - 29 Aug 2018