Investment Highlights

• We cut our FY18-20F earnings forecasts by 24%, 23% and 16% respectively, reduce our FV by 55% to RM0.52 (from RM1.15 previously – adjusted for a 1-for-6 bonus issue) and downgrade our call from BUY to HOLD. Our revised FV is based on 7x FY19F FD EPS (from SOP previously), in line with our reduced benchmark target forward PE of 7-9x for small-cap construction stocks (from 10-12x previously).

• Amidst the uncertain outlook for Protasco’s key divisions, i.e. road maintenance (a potential review of contracts previously awarded), construction (due to the review of projects by the government), and property (due to the prolonged sector slowdown), we believe that the market will derive greater comfort by valuing Protasco in its entirety based on its near-term earnings potential, i.e. PE (vs. a combination of PE, RNAV and DCF — this accords more generous valuations to long-term assets such as landbank and road maintenance concessions that may not be realisable under the current environment).

• Protasco’s 1QFY18 result missed expectations with a net loss of RM2.1mil vs. our full-year net profit forecast of RM47mil and full-year consensus estimates of RM42.4mil, and against a RM3.3mil net profit in 1QFY17. We believe the key variance against our forecast came from the slower-than-expected billings of PPA1M Phase 2 project and unabsorbed overheads from its property division due to the absence of new property launches amidst a soft property market.

• These were partially cushioned by stronger performance from: 1) its maintenance division due to increased periodic works executed in 1QFY18; and 2) improved earnings from its engineering services division.

• The earnings downgrade is to reflect the weaker performance across the board, including a lower FY18-20F construction order book replenishment assumption of RM100mil annually (from RM200mil). In FY17, Protasco secured RM400mil worth of new jobs.

Source: AmInvest Research - 31 May 2018