Protasco’s 1Q15 results missed our forecast. We maintain our BUY call but cut our FY15-17 earnings forecasts by 15%, 11% and 13% respectively, and TP by 3% to MYR2.27 (23% upside). Protasco offers strong earnings growth backed by its expanding construction and property businesses, and a high dividend yield of 6.5% underpinned by strong cash flow from its road maintenance concessions.

A slow 1Q15. Protasco’s 1Q15 net profit missed our expectations, coming in at only 17% of our full-year forecast (consensus estimates are not available). We believe the key variance against our forecast came from lower-than-expected construction billings, coupled with increased cost pressure.

Forecasts. We cut our FY15-17 earnings forecasts by 15%, 11% and 13% respectively after we update Protasco’s outstanding construction orderbook – it has put on hold the MYR88m PR1MA housing contract in Perak and Negeri Sembilan due to unresolved land issues.

Risks: i) new construction jobs secured in FY15-17F falling short of our assumption of MYR200m per annum, ii) escalating input costs, iii) poor demand for new property launches from De Centrum, and iv) non– renewal of road maintenance concessions (our forecasts assume shortterm 12-month extensions to concessions which are expiring within our forecast period. These concessions are currently pending signing of formal long-term concession renewal agreements).

Maintain BUY. Protasco offers high earnings growth backed by its expanding construction and property businesses. Its construction profits will be underpinned predominantly by the MYR600m 1Malaysia Civil Servants Housing Project (PPA1M) in Putrajaya (26% completed at present), while property profits will be driven by new launches from its MYR10bn De Centrum integrated property project in Bangi, Selangor. Meanwhile, its highly cash-generating road maintenance concessions will underpin a 12 sen dividend based on our forecast, which translates into a 6.5% yield. Our SOP-derived TP declines by 3% to MYR2.27 (from MYR2.35) (see Figure 5) after the earnings downgrade.

Source: RHB Research - 28 May 2015