• Protasco’s 4Q2019 net profit stood at RM1.0 mln vs. a net loss of RM44.2 mln 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. Revenue for the quarter, however, decreased 10.4% Y.o.Y to RM242.2 mln, dragged down by lower contribution from the construction segment.

• For 2019, cumulative net profit stood at RM6.0 mln vs. a net loss of RM48.1 mln recorded in 2018. Revenue for the year, however, fell 9.0% Y.o.Y to RM823.6 mln. The reported earnings fell below our expectations, making up to 65.5% of our full year net profit forecast of RM9.1 mln for 2019, due to higher depreciation charges and finance costs. Meanwhile, the reported revenue exceeded our expectations, amounted to 110.8% of our full year estimate of RM743.2 mln.

• Segmentally in 4Q2019, the construction segment’s pre-tax loss narrowed to RM8.3 mln vs. a pre-tax loss of RM34.5mln on one-off impairments and write offs recorded in in 4Q2018. The property development segment’s pre-tax loss also narrowed to RM0.5 mln vs. a pre-tax loss of RM2.6 mln in 4Q2018 in absence of further impairments. The maintenance segment’s pre-tax profit jumped 119.3% Y.o.Y to RM15.9 mln due to higher work orders. The engineering services segment’s pre-tax profit stood at RM67,000 vs. a pre-tax loss of RM5.5 mln in 4Q2018 on cost rationalisation measures. The trading & manufacturing segment’s pre-tax profit surged 177.2% Y.o.Y to RM1.0 mln, while the education segment’s pre-tax profit jumped 217.1% Y.o.Y to RM1.7 mln.

Prospects

Once again, Protasco did not able to secure any major construction projects in 4Q2019. This brings the group’s construction outstanding orderbook of approximately RM515.0 mln will provide earnings visibility over the next 2-3 years. At the same time, Protasco is tendering for some RM2.00 bln worth of new projects on affordable civil servant housings, building and infrastructure works. Moving forward, we have imputed an orderbook replenishment of RM200.0 mln for 2020.

Elsewhere, we note that Protasco has secured a ten-year contract from the Public Works Department for the maintenance of state roads in Sarawak. This bumps Protasco’s outstanding orderbook to approximately RM3.90 bln that will continue to provide long term earnings visibility until 2029.

Over at the property development segment, the De Centrum project saw all the remainder of unsold units converted for student accomodation. 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.

Protasco’s joint development with Penmaland that entails the development of affordable landed housing projects on a 137.1 ac. land close to Tampin town will see Phase 1 of double-storey terrace house with a GDV of RM60.0 mln to be launched in 4Q2020. The overall project carries a GDV of approximately RM371.0 mln over 7-12 years. We also note that Protasco is actively seeking to monetise some low-yield assets, should opportunity arise.

Despite the reported earnings came below our expectations, we raised our earnings estimates by 53.9% and 46.8% to RM16.0 mln and RM23.3 mln for 2020 and 2021 respectively, on the higher contribution from the maintenance and property segment, coupled with the lower effective tax rate.

Valuation and Recommendation

We upgrade our recommendation on Protasco to HOLD (from Sell) with a higher target price of RM0.36 (from RM0.30). Moving forward, we expect Protasco’s earnings recovery to pick-up following the cost-rationalisation undertaken at end-2018, coupled with stronger billings from both the construction and maintenance segments.

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 weaker-than-expected the targeted construction orderbook replenishment amount and slower work orders for the concession segment. Weak property sales from new launches will also not be favourable to its property development business.

Source: Mplus Research - 28 Feb 2020