Protasco won 2 road maintenance contracts in Perak worth RM216m. These contracts are an extension of its existing ones. Separately, management updated us that construction margin for PPA1M Phase 2 (RM301m) will not be as high as Phase 1 (completed). Also, despite 3 years of no new property launches, new launches for FY18 (Pasir Gudang shop lots and Kota Bahru apartments) have yet to happen. With this in mind, we take this as an opportunity to revisit our earnings forecasts and cut FY18-19 by 12% and 16%. Maintain HOLD with lower TP of RM1.00 (from RM1.14) at an unchanged 12x P/E on FY18 earnings.

NEWSBREAK

Protasco announced that its 51% subsidiary has won 2 road maintenance contacts in Perak from the state government which are:

• Agriculture roads for 5 years (plus 2-year extension) with a sum of RM90.1m for the first 2 years (subject to review every 2 years). This will commence Mar 2019 until Feb 2026 (including the 2-year extension).

• State roads for 5 years (plus 2-year extension) valued at RM126.1m for the first 2 years (subject to review every 2 years). This contract is an extension of its existing contract which expires in Dec 2019.

HLIB’s VIEW

Continuation of existing contracts. Protasco has 2 existing maintenance contracts in Perak for agriculture roads (13,084 km) and state roads (1,959 km) which expires in Feb and Dec 2019, respectively. As such, these contract wins can be viewed as an extension of its existing contracts. Our estimates indicate that these 2 existing contracts form 18% of Protasco’s maintenance revenue or 10% of total group revenue.

Other updates. We take this opportunity to review our overall earnings assumptions following our recent chat with management. Notably, management guided that construction margin for its PPA1M Phase 2 job (RM301m) will not be as high compared to Phase 1 (completed). For property, Protasco had no new launches over the past 3 years, leading to a downward earnings spiral for the division (property barely broke even in FY17). In terms of new launches, management shared that it will be launching (i) shop lots in Pasir Gudang (RM120m) once bookings hit 30%; and (ii) Telipot Apartment, Kota Bahru (RM160m) in May-June this year.

Forecast. While the recent 2 maintenance contract wins are positive for Protasco, the downward revision in our construction margin and scaling back on property sales lead us to downgrade FY18-19 earnings by 12% and 16%, respectively.

Maintain HOLD, TP: RM1.00. Following the earnings cut, our TP is reduced from RM1.14 to RM1.00 at an unchanged 12x P/E on FY18 earnings. While we like Protasco for its defensive road maintenance business, we feel that this is still insufficient to counter the cyclicality of its construction and property segments which have not been doing too well of late. Nonetheless, any significant downside should be supported by decent yields of 5.4-6.3% for FY18-19.

Source: Hong Leong Investment Bank Research - 6 Apr 2018