We  maintain  our  BUY  recommendation,  forecasts  and  MYR1.80  FV. Protasco’s sessions during  our  recent  ASEAN & Hong Kong Corporate Day in Singapore were very well attended.  It  is good small-cap proxy to public  infrastructure  spending,  particularly  road  maintenance  and public  housing.  We  also  like  Protasco  for  its  MYR10bn  De  Centrum integrated development in Bangi.

• Concession  renewal  imminent.  Protasco  is  confident  that  its  road maintenance concessions will be renewed  upon expiry, premised upon: i)  a  “recent  precedent”  (ie  the  recent  renewal  of  a  third-party  road maintenance concession for federal roads in Johor, Melaka and Negeri Sembilan), ii) Protasco having  done a good job in grooming a sizeable number  of  “Class  F”  contractors,  and  iii)  a  strong  partner,  ie  a Bumiputera-controlled fund which holds a 28% minority stake, in one of the concessions.
• Strong  pipeline  of  new  construction  jobs.  Protasco  guided  for  new construction jobs  worth MYR500m to MYR1bn over the next 12 months,potentially comprising  a second large-scale public housing project, work packages  of  the  MYR10bn  Pan-Borneo  Expressway  and  infrastructure works for a high-profile mega project in Malaysia.
• Limited  impact  from  property-cooling  measures.  Protasco  believes its property business will be relatively spared  from  the impact of  cooling measures as Bangi, where Protasco’s MYR10bn integrated development named  De  Centrum  is  located,  is  not  generally  a  hotbed  of  property speculation  and  foreigners  make  up  only  a  small  percentage  of  its buyers.
• Maintain BUY.  Protasco is good small-cap proxy to public infrastructure spending in Malaysia, particularly  road maintenance and public housing. We  also  like  Protasco  for  its  MYR10bn  De  Centrum  integrated development  in  Bangi.  A  strong  balance  sheet  and  highly  cashgenerating  road  maintenance  concessions  will  underpin  an  8  sen dividend at the minimum (as guided),  which  translates  into a 5.7% yield (we  assume  10  sen,  translating  into  a  7.1%  yield).  Our  FV  is  kept unchanged at MYR1.80, based on “sum of parts”.

Investors Warming Up To Protasco
Back  on  investors’  radar  screen.  Protasco  attracted  a  substantial  audience  of regional fund  managers during  our  recent  ASEAN  &  Hong  Kong  Corporate  Day  in Singapore.  The  company  managed  to  meet  up  with  about  30  fund  managers representing more than 20 asset management companies over six 1 -hour sessions, during its first participation in a regional investor  conference in almost a decade. We could sense  that most  fund managers actually came prepared (armed with a long list of questions) that we take as an encouraging sign.

Highlights  of  FAQs.  Among  the  frequently  asked  questions  (FAQs)  during  the sessions are: i) chances of Protasco’s road maintenance concessions being renewed upon  expiry,  ii)  prospects  of  construction  job  wins  for  Protasco  in  FY14,  and  iii) impact of cooling measures on Protasco’s property business.Concession  renewal  imminent.  Fund  managers  were  generally  concerned  if Protasco’s road maintenance concessions will be renewed upon expiry, especially, the largest  one  in terms of value, ie.  the maintenance concession for federal roads covering  a total of 7,104 km in Pahang, Terengganu, Kelantan & Selangor (with an outstanding  value  of  MYR560m  and  expiry  in  Feb  2016)  (see  Figure  1).  Protasco said  that  it  had  “submitted  an  application  for  extension”  and  is  confident  about securing a Letter of Intent for its  extension “within the next six months”. Thereafter, it normally  takes  another  year  for  the  parties  to  iron  out  the  detailed  terms  before  a Letter  of  Award  will  be  issued  by  the  Government.  Protasco’s  optimism  for  the renewal is premised upon: i)  A “recent precedent” (based on our source, a Letter of Intent for the extension of an  expiring  road  maintenance  concession  has  recently  been  issued  to  Selia Selenggara Selantan SB, the concessionaire for federal roads covering a total of 4,178 km in Johor, Melaka and Negeri Sembilan),
ii)  Protasco having  done a good job in grooming a sizeable number of “Class F” contractors.  Largely  owned  and  run  by  Bumiputera  individuals  or  companies, these  small  contractors do various sub-contracting works for Protasco including grass  cutting,  road  shoulder  upkeeping,  litter  collection  and  signage  cleaning, and iii)  A strong partner in the concession, ie a Bumiputera-controlled fund which holds a 28% minority stake.

Strong pipeline of new construction jobs.  Protasco guided  for  a strong pipeline of new construction  jobs. It hopes  to clinch new contracts worth MYR500m to MYR1bn over  the  next  12  months  (vis-à-vis  our  assumption  of  only  MYR200m  for  FY14). These  new  jobs  could  potentially  come  from  a  second  large-scale  public  housing project  (recall,  in  Oct  2013,  Protasco  bagged  the  first  one  worth  MYR579m  from Putrajaya Corporation for the construction of 1,680 apartments in Putrajaya under the 1Malaysia  Civil  Servants  Housing  Programme  (PPA1M)),  work  packages  of  the MYR10bn Pan-Borneo Expressway (we understand, via a JV with a Sarawak’s stateowned  company),  and  infrastructure  works  for  a  high-profile  mega  project  in Malaysia.  At  present,  Protasco’s  outstanding  construction  orderbook  stands  at MYR621m (see Figure 2) that will keep it busy for the next 2-3 years

Limited  impact  from  property  cooling  measures.  Protasco  believes  its  property business will be  relatively spared  from  the impact of  cooling measures  introduced by the  Government  recently,  including  a  heftier  real  property  gains  tax  (RPGT),  the MYR1m  threshold  for  foreign  property  purchases,  and  the  prohibition  of  the developer interest bearing scheme (DIBS). This is because Bangi, where Protasco’s MYR10bn  integrated development named  De Centrum  is located, is not generally a hotbed of property speculation, and foreigners make up only a small percentage of its buyers.  Nonetheless,  Protasco  did  acknowledge  that  an  oversupply  situation  is emerging in the office sub-segment in the Klang Valley, and as such, it will hold back launches of this product type for now.

To recap, De Centrum is essentially the redevelopment of  Protasco’s very prime 100-acre  University Kuala Lumpur (IUKL) land  in Bangi  into an  integrated development comprising residential, shop and office units, as well as a neighbourhood mall, hotel and  convention  centre.  At  present,  the  land  is  very  much  under-utilised,  housing mainly the IUKL campus and some small workshops and commercial office blocks, with vast undeveloped tracts. The project will entail the development of these tracts, as well as the relocation of the existing main-road-fronting IUKL campus to the inner part of the land, making way for commercial development.

For  FY14,  Protasco  only  plans  to  put  onto  the  market  two  blocks  of  mid-priced apartments  within  De  Centrum  with  a  GDV  of  about  MYR130m.  We  believe  this coming launch comprising a total of 320 units (including 80 duplex units) priced at an average of MYR380 per sq ft  will be well-received,  given a strong rental market  for residential properties  within  De Centrum backed by IUKL’s student population, which currently stands at about 4,000 (projected to grow by around 15-20% per annum) as well as staff strength of about 350 (expected to grow by around 10-15% per annum).

At present, international students from more than 50 countries make up about 40% of IUKL’s student  population,  with the top five countries of origin being Sudan, Yemen, Nigeria, China and Libya. These foreign students require accommodation, the same goes for  local students who hail from other states.   This  upcoming launch will bring total  launches  from  De  Centrum  in  terms  of  value  to  MYR380m.  Based  on  our estimates, Protasco has already locked in about MYR200m sales from the MYR264m maiden  launch  of  De  Centrum  last  year  comprising  apartments,  shops  and  smalloffice-home-office (SOHO) units (at an average selling price of MYR500 per sq ft), and a neighbourhood mall  (which Protasco will retain as an investment property). In our earnings forecasts, we assume property billings to double to MYR40m in FY14 from MYR20m in FY13.

Forecasts. Maintained.

Risks.  These  include: i) new construction contracts secured in FY14  falling short of our assumption of MYR200m, and ii) escalating input costs.

Maintain BUY.  Protasco is a  good small-cap proxy to  public infrastructure spending in Malaysia, particularly road maintenance and public housing. We also like Protasco for its MYR10bn  De Centrum  integrated development in Bangi, which  is essentially the redevelopment of its 100-acre IUKL land acquired at a very low price more than a decade ago.  A  strong balance sheet (with a net cash of MYR62.7m or  19  sen per share) and highly cash-generating road maintenance concessions will underpin  an 8 sen  dividend  at  the  minimum  (as  guided),  which  translates  into  a  5.7%  yield  (we assume 10 sen, translating into a 7.1% yield). Our FV is kept unchanged at MYR1.80 based  on  “sum  of  parts”,  valuing  its  IUKL  land  at  market  price,  road  maintenance concessions by DCF, and construction and other businesses  at 10x FY14 earnings (see Figure 3).

Financial Exhibits

SWOT Analysis

Company Profile
Protasco’s core business is the maintenance of federal and state roads under five concessions. This key segment contributes about 60-70%  of  total  profits.  The  remaining  profits  come  from  construction,  engineering  services,  property  development,  trading  & manufacturing and education. Protasco has identified property development and construction as its key growth drivers going forward –the former backed by the redevelopment of its 100 -acre IUKL land in Bangi, while the latter underpinned by an expected strong pipeline of new public construction jobs.

Recommendation Chart

Source: RHB