Highlights

• Backed by concessions and LTCs. Protasco holds 2 concessions to maintain Federal roads in the states of (i) Selangor, Pahang, Kelantan and Terengganu which was renewed in Feb 2016 and (ii) Sarawak covering Sibu, Bintulu and Mukah. It also has 4 long term contracts (LTCs) to maintain State roads in Perak, Kelantan and Terengganu. Maintenance orderbook of RM4.4bn (9x cover ratio) provides a stable earnings base for the next 10 years.
• Sarawak concession renewal likely. Negotiations for the Sarawak concession renewal (expiring Feb 2018) are in at advanced stage with an outcome expected this year. While Protasco’s stake will likely be reduced from 100% to 30%, road length maintained may double.
• Potential election beneficiary. We view Protasco as an election beneficiary as spending on road maintenance increases running up to the polls, which must be held by Aug 2018. To expand its recurring income base, Protasco is targeting the maintenance of government buildings.
• Gunning for more job wins. Protasco’s construction division has orderbook of RM601m (2x cover ratio). It holds a Letter of Intent (LOI) for Phase 3 of the PPA1M housing (RM120m) in Putrajaya. Apart from that, Protasco is eyeing on new jobs in excess of RM4bn. These include highways (RM1bn), infra for a hydro plant (RM800m), affordable housing and buildings (RM600m) and a government job via the BLT model (>RM2bn).
• New launches to resume. Property sales have been on a downtrend since FY14 with no significant launches in the past 2 years. This is set to reverse in FY17 with RM830m in new launches coupled with RM115m worth of inventories.

Risks

• Non-renewal of the Sarawak concession and slow property take up rate.

Forecasts

• We expect FY17 earnings to decline -20% YoY. While maintenance should recover, we expect weaker construction (timing gap) and property (no unbilled sales).
• However, earnings should recover YoY in FY18-19 by 37% and 15% respectively driven by new job wins, more maintenance works and new property launches.

Rating

• Initiate with BUY, RM1.20 TP (+19.9% total return)
• We like Protasco for the defensive qualities of its maintenance business which places a floor to downside risk via decent dividend payments.

Valuation

• Our TP of RM1.20 is based on a 12x P/E multiple pegged to mid-FY18 earnings.
• Dividend yield is also decent at 5.6% and 7.7% for FY17-18 assuming a 70% payout ratio (average: 73%).

Source: Hong Leong Investment Bank Research - 09 Jun 2017