Summary

• Protasco Bhd's 2QFY20 net loss stood at RM1.7m vs. a net profit of RM2.8m recorded in the previous corresponding quarter, dragged down by the lower contribution across all but the maintenance segment. Revenue for the quarter decreased 8.8% YoY to RM171.9m. For 1HFY20, cumulative net loss stood at RM4.2m against a net profit of RM4.0m recorded in the previous corresponding quarter. Revenue for the period slipped 13.5% YoY to RM354.9m.

• The reported losses were within our expectations against our net loss forecast of RM4.6m, while consensus forecast stood at net profit of RM0.4m for FY20f. Meanwhile, the reported revenue also came within our expectations, amounted to 49.0% of our full year estimate of RM626.5m and 43.3% of consensus estimate of RM710.0m.

• While there is an absence of new contracts flow to-date, we reckon that jobs will start to pick-up moving into the final quarter of the year as the economy gradually recovers. Moving forward, Protasco’s construction outstanding orderbook of over RM480.0m will provide earnings visibility over the next 2-3 years. For 2020, we retained our orderbook assumption replenishment to RM100.0m.

• The maintenance segment will provide some cushion to the weakness from other segment’s earnings backed by an outstanding orderbook to approximately RM3.70bn that ensure recurring stream of income till 2029.

• With both Sentrio Business Centre and D'Perdana Telipot developments take-up rates remain unimpressive, both projects have yet to commence construction. Therefore, there will be no contribution over the near term. Meanwhile, Protasco’s joint development with Penmaland on the 137.1-ac. development of affordable landed housing projects close to Tampin town will see Phase 1 of double-storey terrace house with a GDV of RM60.0m to be launched in 4Q2020.

• Protasco is actively seeking to monetise some low-yield assets, should opportunity arise. Already, three pieces of commercial land measuring approximately 2.7-ha was disposed and should provide some cash flow stability and margins improvements.

Valuation & Recommendation

• With the results came in line with our estimate and we expect 2HFY20 numbers to be flat, we made no changes to our earnings forecast. Looking ahead into FY21f, we think that the valuations have now turned more appealing following the share price weakness and we upgrade Protasco to BUY (from Hold) with an unchanged target price of RM0.31.

• Our target price is derived via a sum-of-parts basis by ascribing a target PER of 8.0x to its FY21f fully diluted construction earnings as well as a target PER of 8.0x to its fully diluted FY21f 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 0.4x to its BV.

• Risks to our forecast and target price include (i) weaker-than-expected the targeted construction orderbook replenishment amount, (ii) slower work orders for the concession segment (iii) weaker property sales from new launches in its property business unit.

Source: Mplus Research - 27 Aug 2020