Results Highlights

• Protasco’s 3Q2018 net loss stood at RM0.8 mln vs. a net profit of RM10.3 mln in the previous corresponding quarter, dragged down by the weakness in five-of-the six business segments. Revenue for the quarter slipped 22.0% Y.o.Y to RM234.9 mln.

• For 9M2018, cumulative net loss stood at RM3.9 mln vs. a net profit of RM21.5 mln recorded in the previous corresponding period. Revenue for the period declined 2.9% Y.o.Y to RM634.5 mln. The reported earnings fell short of our previous 2018 net earnings forecast of RM20.2 mln, whilst the reported revenue came within our expectations, amounting to 76.3% of our full year estimate of RM831.4 mln.

• Segmentally, the maintenance segment’s pretax profit fell 29.3% Y.o.Y to RM13.3 mln, due to higher operating expenses and lower margins from periodic maintenance works. The construction segment’s pretax loss widened to RM4.8 mln vs. a pretax loss of RM1.8 mln in the previous corresponding quarter on cost overrun in certain projects and higher overhead costs. The bottomline’s variance is due to the higher effective tax rate of 72.0% vs. our assumption of 30.0%)

• The property development’s pretax loss stood at RM1.6 mln vs. a net profit of RM0.3 mln in the previous corresponding quarter in the absence of new launches. The engineering services’ pretax profit slipped 49.3% Y.o.Y to RM2.6 mln on lower geotechnical works. The trading & manufacturing’s pretax loss stood at RM0.1 mln vs. a pretax profit of RM1.1 mln recorded in the previous corresponding quarter on higher interest expenses. The education segment’s pretax profit, however, jumped 28.1x Y.o.Y to RM1.1 mln on lower operational costs.

Prospects

It was another quiet quarter for Protasco with the absence of new projects secured. Moving forward, Protasco’s outstanding orderbook RM1.02 bln will sustain earnings over the next three years. The group is also bidding some RM1.00 bln worth of construction projects, comprising of affordable civil servant housings, building and infrastructure projects. However, we reckon that the general construction sector will remain subdued in view of the lack of fresh catalysts from the tabling of Budget 2019.

Meanwhile, the maintenance segment’s outstanding orderbook of approximately RM4.70 bln will continue to provide long term earnings visibility until February 2028. Moving forward, the group will be eyeing on a slice of RM926.0 mln allocation to upgrade roads, rural roads and bridges in Budget 2019.

As of 3Q2018, the group’s unsold properties amounts to approximately RM30.0 mln, mainly from De Centrum Unipark Phase 2 project. We also note that Sentrio Business Centre and D'Perdana Telipot, which has a combined GDV of RM226.0 mln that was launched in July and August 2018 respectively, have achieved satisfactory take-up rates.

Valuation and Recommendation

With the reported earnings coming below our estimates, we slashed our earnings forecast as we now expect Protasco to remain in the red with a net loss of RM3.3 mln in 2018, before returning into profitability with an expected net profit of RM25.0 mln (down from RM25.7 mln previously) for 2019. Our lower earnings assumption reflects the slower execution in both the construction and maintenance segments, coupled with margins compression due to higher overhead costs.

Following the recent weakness on its share price, we upgrade Protasco to BUY (from Hold), but with a lower target price at RM0.52 (from RM0.62). We expect Protasco’s earnings recovery in 2019 to be anchored mainly from its bread and butter businesses – construction and maintenance segments that possesses 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 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 its 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 - 28 Nov 2018