We  change our valuation method to DCF (from land’s market value) for De  Centrum  property  project.  Maintain  our  BUY  call  and  forecasts  for Protasco, but raise our FV by 21% to MYR2.18 (from MYR1.80), Protasco is  a  good  small-cap  proxy  to  public  infrastructure  spending  in  road maintenance  and  public  housing.  We  like  its  MYR10bn  De  Centrum project in Bangi and attractive dividend yield of 5-6%.

• We now use DCF to value De Centrum. We now value Protasco’s 100-acre  De Centrum  integrated  property project in Bangi, Selangor, with  a GDV of MYR10bn over 15 years,  at MYR427m based on DCF,  up 42% from  MYR300m  based  on  the  land’s  market  value  previously.  The change  to  a mid-cycle  valuation basis  (DCF) from  a  low-cycle  one  (the land’s  market  value) is to  reflect  the recent upgrade in our weighting for the  property  sector  to  OVERWEIGHT  from  Neutral  (see  our  27  March 2014  Sector  Update  Property  Sector  -  Ready  For  a  Rebound).  In  our DCF  valuation  for  De  Centrum,  we  apply  an  average  net  margin  of 13.5%  and  a  discount  rate  of  10%  (benchmark  for  property  projects). Also, we conservatively assume a GDV of only MYR5bn over 25 years, vis-à-vis MYR10bn over 15 years based on Protasco’s existing plans.
• Risks.  i)  new  construction  jobs  secured  in  FY14  falling  short  of  our MYR200m estimate (Protasco has secured MYR88m YTD), ii) escalating input costs, and iii) poor demand for De Centrum.
• Maintain  BUY.  We  project  Protasco’s  FY14  earnings  to  grow  41%, driven largely by: i) contributions from two public housing projects with a combined  value  of  MYR667m  (see  Figure  1),  and  ii)  the  first  full-year contribution  from  De  Centrum.  Protasco  is  a  good  small-cap  proxy  to public infrastructure spending  in  road maintenance and public housing. We also like De Centrum – which involves the redevelopment of the 100-acre  Infrastructure  University Kuala Lumpur  (IUKL)  land  in Bangi  that it acquired at a very low price. Its  strong balance sheet (with a net cash of MYR161.4m  or  49  sen  per  share)  and  highly  cash-generating  road maintenance  concessions  will  underpin  a  10  sen  dividend,  which  will translate  into  a  5-6%  yield.  We  upgrade  our  FV  by  21%  to  MYR2.18 (from MYR1.80), after factoring in higher valuations for De Centrum (see Figure 2).

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 profit. The remaining profit comes from construction, engineering services, property development, trading & manufacturing and education. The group has identified property development and construction as its key growth drivers going forward  –  the former  is backed by the redevelopment of its 100-acre IUKL land in Bangi, while the latter is  underpinned by an expected strong pipeline  of new public construction jobs.

Recommendation Chart

Source: RHB