28 Aug 2019, Kajang, Selangor, Malaysia.

Road maintenance contractor Protasco Bhd saw huge business declines and no sign of recovery across all sectors in terms of sales and bottomline, especially road maintenance and property development segments, except the controversial construction segment which cover up the short falls accounting wise. Hong Leong Investment Bank Research (HLA) rated Protasco Bhd a SELL call, with target price downgraded to RM0.18.

Alarming Cash Short Falls & Liabilities.

In financial year 2018, Protasco Bhd notable financial irregularity spooked the market when the so called "RM44million profits" attributed to the earlier phases of construction projects (during year 2014-2016) were written off all together as if all the numbers booked in the earlier years were created out of thin air. Main contribution to the construction segment is notably government servant's affortable house project (PPA) awarded by former government. 

In other words, PPA was proven a loss making project, and worst, incures huge financing cost and risk. Why would Protasco Bhd continue to use banks such as UOB to bank-roll a no-margin (loss-making) business? As of latest June 2019 quarterly report, Protasco Bhd total liabilities stood at RM661mil vs equity of RM351mil. Total borrowings ballooned to RM348mil, up from RM228mil y-to-y. A total of RM350mil was raised and spent during year 2014-2018, and vanished in thin air, resulted in the gigantic RM661mil liabilities. Where the money goes?

According to Protasco Bhd 2014 - 2018 cash flows, the current management used the now proven inflated "profitable results" to borrow money and paid out the cash for senior management and directors fees, benefits and dividends, as well as significant "major minitories interest". The cash also paid to non core minority subsidiary such as "solar projects" related to a Protaso Bhd executive director, as well as using Protasco Bhd and resources to acquire a land in Tampin from a Protasco Bhd executive director cum substantial shareholder.

Predictably, Protasco Bhd June 2019 quarterly report once again announced 0.6 sen dividend, on the basis of reported a "profitable quarter". Without PPA project phase 2, Protasco Bhd has no excuse to further draw down bank loan. The current debt to equity ratio of almost 2 : 1 is alarmingly risky and non sustainable, not to mention close to RM2.5mil bank interest default risk. Protasco Bhd needed to made up the short falls in turnover and bottomline in order to sustain their spending.

Below Expectations.

According to Hong Leong Investment Bank Research (HLA), Protasco’s 1HFY19 core PATAMI of RM4.0m were below both HLA and consensus estimates. This is mainly due to lower contribution from maintenance and property segments. Current outstanding construction orderbook stands at RM655m, translating into a healthy cover ratio of 2.5x to FY18 construction revenue. Cut FY19-20 earnings forecast by 9.7% and 35.4% respectively after taking into account lower contribution from maintenance and property segments. Introduce FY21 earnings forecast of RM9.5m.

Reviewing the real facts and figures, HLA maintain Protasco Bhd the SELL rating with lower TP of RM0.18 (from RM0.20) following earnings cut. HLA TP is pegged to 7x FY19 earnings.