Results Highlights

• Protasco returned to the black in 1Q2019 with net profit amounted to RM1.2 mln vs. a net loss of RM2.1 mln recorded in the previous corresponding quarter, underpinned by improved contribution from the construction sector, coupled with the completion of its right sizing exercised at end 2018. Revenue for the quarter gained 5.6% Y.o.Y to RM166.3 mln.

• The reported earnings make-up to 6.0% of our full year net profit forecast of RM20.4 mln for 2019. The reported revenue amounted to 17.3% of our full year estimate of RM961.7 mln.

• Segmentally in 1Q2019, the maintenance segment’s pretax profit fell 12.2% Y.o.Y to RM8.9 mln due to lower periodic works. The property development segment’s pretax loss widened to RM3.0 mln vs. a pretax loss of RM2.6 mln in 1Q2018 on lower sales recognition of the De Centrum project. The trading & manufacturing’s pretax profit fell 45.6% Y.o.Y to RM199,000 mln, while the engineering services segment’s pretax profit declined 37.7% Y.o.Y to RM1.2 mln on lower geotechnical works.

• On a brighter note, the construction segment’s pretax profit stood at RM3.9 mln vs. a pretax loss of RM1.3 mln in the previous corresponding quarter on higher contribution from the Project Perumahan Awam (PPA) Phase 2 project, while the education segment’s pretax loss narrowed to RM0.9 mln vs. a pretax loss of RM1.6 mln recorded in 1Q2018 due to cost optimisation exercised in 3Q2018. A dividend of 0.6 sen per share for the quarter, payable on 10th July 2019, was declared.

Prospects

In 1Q2019, Protasco did not secure any major construction projects. Moving forward, Protasco’s outstanding orderbook of approximately RM707.0 mln from PPAM projects and Department of Drainage and Irrigation works will sustain earnings over the next 2-3 years. In the meantime, we reckon that the cancellation of PPAM projects will be replaced by another government entity to tackle the housing affordability issue, of which Protasco can leverage on. Protasco is also tendering for some RM1.0 bln worth of affordable civil servant housings, building and infrastructure projects.

Meanwhile, the maintenance segment’s outstanding orderbook of approximately RM4.10 bln will continue to provide long term earnings visibility until February 2028. Moving forward, the group will continue to bid for the RM926.0 mln allocation to upgrade roads, rural roads and bridges announced under Budget 2019.

Over at the property development segment, the De Centrum project saw two units sold in 1Q2019, reducing the inventory to 41 units, valued at RM22.8 mln. Meanwhile, Sentrio Business Centre and D'Perdana Telipot developments that have combined GDV of RM226.0 mln, are still at the pre-launching stage. Therefore, there will be no contribution over the near term. In the meantime, the first phase of Tampin Land at Negeri Sembilan that comprises of landed properties, is targeted for launch at end-2019 upon obtaining necessary approvals.

Elsewhere, we expect the education segment to remain in red in view of the declining number of student. Nevertheless, Protasco has undertaken a rationalisation exercise and cost optimisation that entails phasing out non-profitable courses that provided some improvement to bottomline margins.

In addition, the energy segment that revolves the development of 6.8 MW solar farm in Melaka of which Protasco holds a 44% equity stake, will see construction commence in 3Q2019 and will only see contribution from 2021 onwards.

Valuation and Recommendation

Although both the reported revenue and earnings makes up less than a quarter of our estimates, we deem the figures to be in-line as the 1H results were traditionally weaker. Hence, we made no changes to our earnings forecast and we maintain our HOLD recommendation on Protasco with an unchanged target price of RM0.25. Moving forward, we expect Protasco’s earnings recovery to sustain for the remainder of 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 delays in concession contract renewals. Further tightening of monetary policies will also be unfavourable to its property development business.  

Source: Mplus Research - 29 May 2019