Summary

• Protasco Bhd's unit Sun Rock Development Sdn Bhd has entered into a contract to dispose of three pieces of commercial land to NSK Property Sdn Bhd for RM16.7m cash. The lands in question are located in Johor Bahru and total about 2.7-ha.

• The sale was owing to Protasco expectation that demand for developed properties will remain weak in the coming years owing to a slowdown in the property market and economy. The disposal is expected to result in a one-off gain of about RM3.1m to Sun Rock Development, to be recognised in FY20, subject to the completion of the disposal.

• We were not surprised by the abovementioned disposal as the group is actively seeking to monetise its assets since last year, which we have mentioned in our previous quarterly results report. We reckon that the disposal is fair, pricing at 1.2x of the BV of the land based on the latest audited financial report in FY19.

• Bulk of the proceeds will mainly be utilised to pare down borrowings (RM11.0m), working capital (RM5.7m) and the remainder RM30,000 to facilitate the expenses in relation to the disposal.

• We reckon that Protasco will generate a net interest saving of RM1.5m per annum based on the utilisation of the proceeds, while the allocation for working capital should cushion the impact of operations slowdown stemmed by Covid-19 without relying on external financing.

Valuation & Recommendation

• The mild upward revision of bottomline stemmed from the interest cost saving is expected to trim FY20 net loss by 2.9% to RM4.6m and improve FY21 core earnings by 5.8% to RM13.5m. Following the recent weakness in share price, we upgrade our recommendation on Protasco to BUY (from Hold) with an unchanged target price of RM0.31 as the earnings revision deem to be miniscule.

• We arrive our target price via a sum-of-parts basis by ascribing an unchanged target PER of 8.0x to its FY21 fully diluted construction earnings, a target PER of 8.0x (unchanged) to its fully diluted FY21 concession and engineering services’ earnings, while its education and trading units’ valuations remain pegged at target PERs of 6.0x respectively due to its smaller scale businesses. Its property development division’s valuation is derived from ascribing an unchanged 0.4x 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 - 14 Jul 2020