Summary

• Protasco Bhd’s wholly owned subsidiary, HCM Engineering Sdn Bhd has entered into a Memorandum of Agreement with K.I. Engineering Sdn Bhd to execute a contract to upgrade federal road in Kulim, Kedah Darul Aman for a contract value of RM299.2m.

• Under the agreement, HCM shall share 70.0% of the profit from the project and act as the implementer to undertake the overall construction and financing of the Project until its completion by 27 January 2026.

• This marks the second major construction contract secured by Protasco year-to date, bumping its construction orderbook replenishment to RM671.9m, which surpassed our initial target of RM500.0m We expect the contract to register high single digit EBITDA margins, which is similar to their historical margins recorded in the construction segment.

• Moving forward, we expect the maintenance segment to anchor the overall performance, backed by multiple long term federal and state road concession agreements will provide earnings visibility till 2029. Nevertheless, the construction segment is also gathering pace, which bodes well for the group overall bottom line as the aforementioned segment was bleeding for the past 2 financial years.

• We expect Protasco to leverage onto its position as a road maintenance specialist with future contracts skewing towards the construction and upgrade of the state and federal roads across Malaysia. Meanwhile, their expertise in the construction of low-cost housing projects will be a boon as the group continues to hinge onto the previous Budget’s announcements, which focuses on tackling the home affordability issue.

• On a side note, their venture into the hotel and hospitality as well as clean energy sector is expected to bear fruit. However, we reckon that bulk of the top and bottomline will still be anchored by the maintenance segment.

Valuation & Recommendation

• We made no changes to our earnings forecast pending the upcoming results release tentatively on 25th August 2022. Therefore, we maintained our BUY recommendation on PRTASCO with an unchanged target price of RM0.21.
• 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 - 16 Aug 2022