Investment Highlights

• We maintain our BUY call, forecasts and SOP-based FV of RM1.42 (Exhibit 2) for Protasco.

• The company’s FY17 core net profit of RM30.2mil missed our and consensus estimates by 13% and 8% respectively. We believe the key variance against our forecast came from the slower-than-expected billings and higher interest expense borne by the company for the completion of PPA1M Phase 1 project which negated its construction’s arm margins. We are giving the company the benefit of the doubt that construction billings and margins should normalise in FY18.

• Protasco’s FY17 net profit dropped 29% YoY mainly due to: 1) slower progress billing coupled with dampened margins from its construction projects; and 2) absence of new property launches amidst a soft property market.

• These were partially cushioned by stronger performance from: 1) its maintenance division following the renewal of federal road maintenance and maiden contributions from two additional state road maintenance concessions secured in 2016; and 2) its engineering services thanks to increased engineering consultancy works for highways and the transport sector and soil investigation services.

• We believe earnings is expected to grow healthily in FY18F underpinned by: 1) accelerated billings from key construction projects such as the PPA1M phase 2 & 4, and SUKE; 2) higher earnings from the road maintenance arm following the renewal of federal road maintenance concession under Roadcare, renewal of federal road maintenance concession in Sarawak and maiden contributions from two additional state road maintenance concessions secured last year; and (3) higher demand for its engineering consultancy works and soil investigation services.

• Meanwhile we are keeping our construction order book assumption FY8-20F at RM200mil annually.

• We continue to like Protasco for: 1) the recurring income stream from its road maintenance concessions with an outstanding value of RM4.6bil which will last until 2026 (and beyond if they are renewed); 2) its growing conventional construction business, particularly the affordable housing segment; 3) the tremendous value of its landbank in Bangi, KL; and 4) its attractive dividend yield of 5-7% per annum.

Source: AmInvest Research - 28 Feb 2018