Protasco is taking legal action to recover a MYR50m deposit it paid foran aborted O&G deal. It is also suing two of its directors for the breachof fiduciary duties. Maintain BUY, forecasts and SOP-derived MYR2.43FV. We see the latest news as nomore than a “rough patch” forProtasco. It still offers investors the best of both worlds – high earningsgrowth and a high dividend yield of 6%. 

Taking vendor and two directors to court. Protasco yesterday filed a legal suit at the KL High Court against: i) PT Anglo Slavic Utama (PT Anglo) for the refund of the MYR50m deposit it paid to PT Anglo in relation to an aborted oil and gas (O&G) acquisition, and ii) two of 
Protasco’s directors – Tey Por Yee and Ooi Kock Aun – for damages arising from the alleged breach of their fiduciary and statutory duties. This includes “the duty to disclose their interest in the transaction, conspiracy to defraud Protasco and the making of secret profit”. 

Negative news, but priced in.The latest development is negative. It implies that: i) Protasco’s recovery process for the MYR50m deposit may now become a complicated and long-drawn affair, and ii) there may no longer be a cordial working relationship between its top two shareholders, ie Dato’ Sri Ir Chong Ket Pen (21%) and Tey (17%). On the other hand, we take comfort that the market may have fully priced in the non-recoverability of the MYR50m deposit (a 17% retracement in share price from its recent peak has effectively wiped out about MYR120m market value from Protasco). Assuming a full impairment for the MYR50m loss, this translates into a one-off loss per share of 15 sen. We believe its ability to pay dividends is intact, as the deposit was previously paid from its surplus cash (not borrowings). As at end-2Q14, the company still had excess cash of MYR45.3m. 

Forecasts.Maintained. An impairment, if any, is regarded as a one-off. 

Maintain BUY. We see the latest development as no more than a “rough patch” for Protasco. We continue to like the company as it offers investors the best of both worlds – high earnings growth (driven by construction and property development projects) and a high dividend yield of 6%, underpinned by strong cash flow from its road maintenance concessions. We keep our SOP-derived FV at MYR2.43 (see Figure 2).

Source: RHB