Protasco’s 9MFY18 core loss of RM3.9m were below both our and consensus estimates. This was mainly due to lower contribution from property, engineering services and education segments coupled with higher than expected finance costs. The maintenance division PBT rebounded 73% QoQ and we view this is positively for Protasco as the division is the core earnings driver for the company. We expect Protasco to benefit from increased allocation for upgrade and maintenance of roads under Budget 2019. Cut FY18 forecast to core loss, FY19-20 earnings forecast by 42% and 46% respectively after take into account higher finance costs and lower contribution from property, engineering services and education segments. Maintain SELL rating with lower TP of RM0.25 (from RM0.37) following earnings cut. Our TP is pegged to 8x FY19 earnings.

Below expectations. Protasco reported 3QFY18 results with revenue of RM234.9m (-3% QoQ, -22% YoY) and core loss of -RM0.8m. This brings 9MFY18 core loss to - RM3.9m, against core profit of RM21.5m in SPLY, way below both HLIB and consensus full year forecast.

Deviations. The results were below expectation mainly due to lower contribution from property, engineering services and education segments coupled with higher than expected finance costs.

QoQ. Core loss shrunk by 17% mainly due to improved performance from maintenance, engineering services and education segments.

YoY. Core loss of -RM0.8m recorded against RM10.3m core profit in 3QFY17 mainly due to lower contribution from engineering services and trading segment coupled with higher overheads in maintenance segment.

YTD. Core loss of RM3.1m recorded against RM11.2m core profit in 1HFY17 mainly due to lower contribution from construction, property and education segment.

Maintenance. The maintenance division PBT rebounded 73% QoQ and we view this is positively for Protasco as the division is the core earnings driver for the company. We expect Protasco to benefit from increased allocation for upgrade and maintenance of roads under Budget 2019.

Education. Education segment is undertaking cost rationalisation measures and is expected to return to profitability going forward.

Forecast. Cut FY18 forecast to core loss, FY19-20 earnings forecast by 42% and 46% respectively after take into account higher finance costs and lower contribution from property, engineering services and education segments.

Maintain SELL, TP: RM0.25. Maintain SELL rating with lower TP of RM0.25 (from RM0.37) following earnings cut. Our TP is pegged to 8x FY19 earnings.

Source: Hong Leong Investment Bank Research - 28 Nov 2018