Results Highlights

• Protasco’s 3Q2019 net profit stood at RM959,000 vs. a net loss of RM810,000 recorded in the previous corresponding quarter, lifted by the lower operational costs following the completion of its right sizing exercise at the end of 2018, coupled with the lower finance costs. Revenue for the quarter, however, fell 3.6% Y.o.Y to RM226.5 mln, dragged down by lower contribution from the maintenance and engineering services segment.

• For 9M2019, cumulative net profit stood at RM4.9 mln vs. a net loss of RM3.9 mln recorded in 9M2018. Revenue for the period, however, declined 8.4% Y.o.Y to RM581.4 mln. The reported earnings make-up to only 24.3% of our previous full year net profit forecast of RM20.4 mln for 2019, due in part to the higher effective tax rate of 54.3% vs. our assumption of 28.5%. Meanwhile, the reported revenue amounted to 60.5% of our full year estimate of RM961.7 mln. The variance was due to the lower revenue from the maintenance & engineering services segment.

• Segmentally in 3Q2019, the construction segment’s pretax profit stood at RM6.8 mln vs. a pretax loss of RM4.8 mln in 3Q2018 on higher contribution from Project Perumahan Awam (PPA) Phase 2 and Drainage and Irrigations works (DID) project. The property development segment’s pretax loss widened to RM1.8 mln vs. a pretax loss of RM1.6 mln in 3Q2018 on lower sales for the De Centrum project. The maintenance segment’s pretax profit fell 23.3% Y.o.Y to RM10.2 mln due to lower periodic works. The engineering services segment’s pretax loss stood at RM3.9 mln vs. a pretax profit of RM2.6 mln in 3Q2018 on lower geotechnical works.

Prospects

Protasco was unable to secure any major construction projects in 3Q2019. Consequently, the groups’ depleting outstanding orderbook of approximately RM513.0 mln from PPA1M projects and Department of Drainage and Irrigation works will sustain earnings over the next 2-3 years. In the meantime, Protasco is tendering for some RM1.00 bln worth of new projects on affordable civil servant housings, building and infrastructure works.

The maintenance segment’s outstanding orderbook of approximately RM3.90 bln will continue to provide long term earnings visibility until February 2028. Moving forward, the group will continue to bid for works under Budget 2020’s allocation to improve the current condition of rural roads and bridges.

Over at the property development segment, the De Centrum project saw a unit sold in 3Q2019, reducing the inventory to 40 units, valued at RM23.4 mln. As the take up rate of both Sentrio Business Centre and D'Perdana Telipot developments remain unimpressive, both projects have yet to commence construction. Therefore, there will be no contribution over the near term.

Elsewhere, Protasco has embarked into a proposed joint development (PJD) with Penmaland that entails the development of affordable landed housing projects on a 137.1 ac. land close to Tampin town. The project carries a GDV of approximately RM371.0 mln over 7-12 years and is expected to be launched in 4Q2019, upon obtaining all the necessary approvals. We also note that Protasco is actively seeking to monetise some assets, should opportunity arise.

As both the reported revenue and earnings came below our expectations, we slashed our earnings estimates by 70.6% and 46.3% to RM6.0 mln and RM9.2 mln for 2019 and 2020 respectively, on the lower contribution from the maintenance segment, coupled with the higher effective tax rate.

Valuation and Recommendation

We downgrade our recommendation on Protasco to SELL (from Hold) with a lower target price of RM0.25 (from RM0.29). Moving forward, we expect Protasco’s earnings recovery to remain subdued in view of the depleting orderbook in both the construction and maintenance segments, coupled with the lackluster property sales.

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 stronger-than-expected the targeted construction orderbook replenishment amount and higher work orders for the concession segment. Firmer property sales from new launches will also be favourable to its property development business.

Source: Mplus Research - 28 Nov 2019