Summary

• Protasco Bhd's 1QFY22 net loss stood at RM5.5m vs. a net profit of RM0.1m recorded in the previous corresponding quarter, mainly on weaker contribution across all segments with the exception of property development and clean energy business segments. Revenue for the quarter slipped 24.8% YoY to RM157.1m.

• The reported net loss came below expectations of our previous full year projected net profit of RM19.3m. The variance was due to the lower periodic maintenance works for the maintenance segment which also bogged down the delivery of raw materials in the trading segment, while the construction segment has turned red owing to the absence of orderbook replenishment in recent years.

• We reckon that the construction segment will remain sluggish over the foreseeable future. In the meantime, the rising building material costs is also not favourable to the overall construction industry which we expect Protasco construction segment to remain in hibernation mode.

• Elsewhere, the joint mixed residential development project in Tampin, Negeri Sembilan known as Jade Hills that carries an estimated GDV of RM371.5m will see the development period for 7 years will be painted into the picture. Phase 1A comprising 74 units single storey terrace Type A and 21 units single story terrace Type B Rumah Mampu Milik is expected to launch in 2Q22 and this may provide some alleviation to the property development segment.

• We believe that the maintenance segment will remain as the key revenue and profit contributor for FY22f, backed by 2 long-term federal road and 5 long-term state road concession agreements that will ensure recurring income stream till 2029. Leveraging onto their expertise, Protasco will be tapping into the RM3.50bn allocated for infrastructure projects under Budget 2022.

• We gather that the diversification efforts to mitigate risks from the slowdown in construction sector is already bearing fruit. The clean energy segment will be supported by stable recurring income over 21 years from the large scale solar photovoltaic (LSS PV) plant of 9.0-MW at Masjid Tanah, Melaka.

Valuation & Recommendation

• Given that the reported earnings came below our expectations (although 2H results are seasonally better), we trimmed the earnings forecast by 23.9% and 9.5% to RM14.8m and RM22.9m for FY22f and FY23f respectively amid the weaker contribution from the maintenance segment. Therefore, we downgrade Protasco to HOLD (from Buy) with a lower price of RM0.21 (from RM0.24).
• Our target price is derived via a sum-of-parts basis by ascribing a target PER of 7.0x to both its FY23f fully diluted construction and concession segments, while the other segment valuations remain pegged at target PERs of 5.0x respectively due to its smaller scale businesses. Meanwhile its property development division is pegged to BV at 0.4x amid the sluggish property market outlook.
• 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 - 30 May 2022