Results Highlights

• Protasco remained in the black in 2Q2019 with net profit amounted to RM2.8 mln vs. a net loss of RM0.9 mln recorded in the previous corresponding quarter, underpinned by improved contribution from the construction segment, coupled with the completion of its right sizing exercised at the end of 2018. Revenue for the quarter, however, fell 22.1% Y.o.Y to RM188.6 mln, dragged down by lower contribution from the maintenance segment.

• For 1H2019, cumulative net profit stood at RM4.0 mln vs. a net loss of RM3.1 mln recorded in 1H2018. Revenue for the period, however, declined 11.2% Y.o.Y to RM354.9 mln. The reported earnings make-up to only 19.5% of our full year net profit forecast of RM20.4 mln for 2019. Meanwhile, the reported revenue amounted to 36.9% of our full year estimate of RM961.7 mln. The variance is mainly due to the lower contribution from the maintenance segment, coupled with the higher effective tax rate at 51.0% vs. our assumption of 28.5%.

• Segmentally in 2Q2019, the construction segment’s pretax profit stood at RM7.7 mln vs. a pretax loss of RM0.2 mln in 2Q2018 on higher contribution from the Project Perumahan Awam (PPA) Phase 2 project and Drainage and Irrigations works (DID) awards. The property development segment’s pretax loss narrowed to RM0.2 mln vs. a pretax loss of RM1.1 mln in 2Q2018 on recognition of higher sales of the De Centrum project. Meanwhile, the maintenance segment’s pretax profit fell 17.0% Y.o.Y to RM6.4 mln due to lower periodic works.

Prospects

Once again, Protasco did not secure any major construction projects. Consequently, Protasco’s depleting outstanding orderbook of approximately RM655.0 mln from PPA1M projects and Department of Drainage and Irrigation works will sustain earnings over the next 2-3 years. The transition period following the cancellation of PPAM projects that will potentially see a merger of all affordable homes initiatives under a single entity continues to create uncertainties. In the meantime, Protasco is tendering for some RM1.00 bln worth of affordable civil servant housings, building and infrastructure projects.

The maintenance segment’s outstanding orderbook of approximately RM4.00 bln will continue to provide long term earnings visibility until February 2028. Moving forward, the group will continue to bid for works under the Budget 2019 allocation to upgrade roads, rural roads and bridges.

Over at the property development segment, the De Centrum project saw a unit sold in 2Q2019, reducing the inventory to 41 units, valued at RM24.0 mln. With the unimpressive take up rate scenario, both 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.

Elsewhere, Protasco has embarked into a proposed joint development (PJD) between De Centrum Retail Sdn Bhd with Penmaland that entails development of landed housing projects on a 137.1 ac. land near Tampin town. The projected carries a GDV of approximately RM371.0 mln over 7-12 years and is expected to launch in 4Q2019, upon obtaining all the necessary approvals.

Valuation and Recommendation

Although both the reported revenue and earnings made up less than half of our estimates, we deem the results to be in-line as the first half results are traditionally weaker, whilst effective tax rate should normalise. Hence, we made no changes to our earnings forecast and we maintain our HOLD recommendation on Protasco with an unchanged target price of RM0.29. 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 2020 fully diluted construction earnings as well as a target PER of 8.0x (unchanged) to its fully diluted 2020 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 Aug 2019