Results Highlights

• Protasco’s 4Q2018 net loss stood at RM44.6 mln vs. a net profit of RM8.7 mln in the previous corresponding quarter, mainly dragged down losses from: (i) cost overrun in certain completed projects, (ii) provision of liquidated and ascertained damages, and (iii) impairment losses on receivables totalling RM41.6 mln. Revenue for the quarter slipped 17.8% Y.o.Y to RM257.8 mln.

• For 2018, cumulative net loss stood at RM48.5 mln vs. a net profit of RM28.1 mln recorded in the previous corresponding period. Revenue for the year declined 5.0% Y.o.Y to RM892.3 mln. The reported earnings exceeded our 2018 net loss forecast of RM3.2 mln, whilst the reported revenue came above expectations, amounting to 111.2% of our full year estimate of RM802.6 mln. Stripping off the impairment losses, however, Protasco’s pretax profit at RM17.8 mln is within our expectations.

• Segmentally in 2018, the maintenance segment’s pretax profit sank 64.1% Y.o.Y to RM8.0 mln due to lower work orders and higher operating expenses. The construction segment’s pretax loss stood at RM0.5 mln vs. a pretax profit of RM0.9 mln in the previous corresponding quarter on cost overrun in certain projects, higher overhead costs and increase in interest expenses. The engineering services segment reported a pretax loss of RM0.9 mln, while the education segment’s pretax profit sank 79.0% Y.o.Y to RM0.7 mln due to decline in number of student intake.

• In contrast, the property development’s pretax loss narrowed to RM0.8 mln vs. a pretax loss of RM2.2 mln in 4Q2017 on higher sales recognition from Block C and D of De Centrum Phase 2B project. The trading & manufacturing’s pretax profit rose 22.7% Y.o.Y to RM2.2 mln on lower operational expenses.

Prospects

It was a year to forget for Protasco which has failed to secure any major construction projects. Protasco’s depleting outstanding orderbook of approximately RM747.0 mln will sustain earnings over the next three years. In the meantime, the group is also bidding some RM1.00 bln worth of construction projects, comprising of affordable civil servant housings, building and infrastructure projects. We reckon that the general construction sector will remain soft in 2019, of which we have imputed a lower construction orderbook replenishment rate of RM200.0 mln for the year.

Meanwhile, the maintenance segment’s outstanding orderbook of approximately RM4.20 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 announced in Budget 2019.

Having sold 12 units of the De Centrum project, the group’s unsold properties is now valued at RM24.0 mln and will see further recognition upon completion of sales. We also note that Sentrio Business Centre and D'Perdana Telipot, which has a combined GDV of RM226.0 mln, are still at the pre-launching stage hence, there will be no contribution over the near term.

In the meantime, we expect the education segment to remain in red in view of declining number of student as a result of cancellation of student loans, namely from Majlis Amanah Rakyat (MARA) and Perbadanan Tabung Pendidikan Tinggi National (PTPTN). The declining number of student intake from China due to rising popularity of other universities such as Xiamen University Malaysia Campus also does not bode well for Protasco.

Valuation and Recommendation

With the reported earnings coming below our estimates, we slashed our earnings forecast by 18.5% and 5.7% to RM20.4 mln and RM19.8 mln for 2019 and 2020 respectively. Our lower earnings assumption reflects the slower execution in both the construction and maintenance segments, coupled with margins compression due to higher overhead costs.

Consequently, we downgrade Protasco to HOLD (from Buy), with a lower target price at RM0.25 (from RM0.52). Nevertheless, we expect Protasco’s earnings recovery to materialise 2019, 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 Feb 2019