8 December 2017, Kuala Lumpur - Protasco Bhd (Bursa Code: 5070) was featured as "biggest proxy for govt road maintenance jobs" for many years. Despite the long-told story, yet from the year2014 until the year 2017, the company cash position seems to deteriorate, resulted in higher bank loan and overdraft geared up to pay "salaries and dividend".

EPF and Protasco director （Chong Ket Pen) seems to be buying a lot of shares. What is so interesting that normal investors cannot spot?

Where Protasco Bhd money goes?

Investors are wondering where the money goes, and what is the justification to have quadrant (management) pay rise as well as a costly dividend while profit margin going down and operating cost going up? Did someone take more than what he deserves?

Hong Leong Research recently downgraded Protasco Bhd to HOLD, and price target lowered to RM1.14 for the first time, after tired of listening to management stories the last few years of "proxy here and proxy there, yet, there is no money".

Perhaps the flows below explains:

The above chart simplified for a layman to understand "where the monies" go. Can you spot the pattern of cash flow? What if the company cannot borrow any more? What about increasing "receivables" and "unbilled collectibles" from the low margin "construction" projects, while bank interest is catching up? Would there be any write-down or write off coming soon? (source: Protasco Bhd Bursa Malaysia annual reports 2013-2016).

Director Keep Buying Shares?

On the other hand, the director (Chong Ket Pen) keeps on buying Protasco shares. Latest Bursa announcement showed 5th and 6th December 2017, the purchase of 200,000 shares and 88,200 shares. The director seems to have plenty of money to buy Protasco Bhd shares, even more than EPF, the now second largest shareholder of Protasco Bhd. How does director keep getting paid while the company is doing badly, and cash is all gone and still use the company to borrow money and pay fees, and the "money" ends up being used to buy shares? Wasn't that beyond "moral" and somehow legally "not right"?

EPF know what they are buying?

EPF has a track record of buying and selling public listed company shares aggressively, despite their huge research team to evaluate each of their investments, they might not have insight study of the "actual" healthiness and happenings of each Plc.

The recent collapse of Sapura Energy Berhad (Bursa Code: 5218) from RM1.30 to RM0.85 as of noon 8th December 2017, surprisingly sawed EPF keep buying the company shares (at a high price) as latest at 5th December 2017, without knowing the 7th December 2017 quarterly report being disastrous. (note2). More devastating, Sapura Energy Bhd was traded as high as RM2.10 in April 2017, and RM5.00 in January 2014.

Exclude potential "political issues and perception", where Sapura Energy Bhd and Protasco Bhd were perceived as "anti-ruling-parties" stocks trailed back to their potentially "old-political" origin & fingerprint, EPF supposedly be independent in their investments as they are holding "Malaysian's money" - including you and me the small flies, our money. So if anything screws up, they can explain "Yes, shxxt happens, just another bad investment"?

That explains EPF investment may not be a good indicator for normal public investors to "believe" in the Plc fundamental or management healthiness purely judge by having their fingerprint on the Plc shares.

A more fundamental analysis is required to zoom into the numbers to see the "truth" before you make any decision. Pertaining to Protasco Bhd fundamentals, perhaps Hong Leong Research or other research houses can better do their job to explain above, instead of copy-and-paste exactly what the management wanted them to tell (fool) the market.

Bursa Zoom-In Analysis

Note1:

Refers to News Report by The Star on 20 October 2017, where share price increase from RM1.06 to RM1.17.

https://www.thestar.com.my/business/business-news/2017/10/20/protasco-biggest-proxy-for-govt-road-maintenance-jobs/

KUALA LUMPUR: CIMB Equities Research has initiated coverage on Protasco  which is the biggest play on government road maintenance contracts, with a dominant 43% market share in the road maintenance space in 2016.

The research house said on Friday the company is the only listed company with direct exposure to this segment and stands to benefit from uptrend in government expenditure on road construction and maintenance (up more than 200% in 2017F to RM5.9bil). 

“Its construction division is vying for RM4.6bil in new contracts, typically rolled out prior to the General Election. We think its earnings will recover in FY18F,” it said.  

CIMB Research believes Protasco offers an attractive risk-reward profile in FY17-18F. Initiate with an Add and a RM1.43 target price (current price RM1.08), based on a 40% discount to end-FY18F realised net asset value (RNAV) implied end-CY18F target price-to-earnings (P/E) of 14.3 times. 
 

“At eight to 11 times CY18-19F P/E, Protasco trades at a 14-18% discount to the P/E valuations of selected small/mid-cap contractors. Key downside risks to our call are weak earnings delivery, poor execution and job delays,” it pointed out.

CIMB Research considers FY16 and FY17F transition years for Protasco’s earnings prior to contribution from road maintenance and construction stepping up to reflect higher-margin recurring earnings from road maintenance (RM4.2bil outstanding order book) and billings for its high RM718mil construction order book. 

It forecasts earnings recovery in FY1819F, with three-year earnings per share (EPS) compounded annual growth rate (CAGR) of 10% (FY16-19F).  

The research house pointed out the share price was 19% lower than the previous high in 2016 and at a massive 55% discount to end-FY18F RNAV. 

“We believe most of the negatives (disappointing FY16 results, likely sustained weak earnings in FY17F and legacy issues, see are reflected in current share price.

 “The stock could be catalysed by: 1) a revival in contract flows, 2) election plays, 3) revival in affordable housing contracts (Protasco’s niche area),” it added.  

CIMB Research also noted that the company’sFY18-19F dividend yields of 6%-7%, the highest in the sector Protasco’s dividend appeal is supported by stable earnings from its road maintenance concessions. 

“We forecast a dividend payout ratio of 60% in FY17-19F (consistent with historical ratios) and exclude potential special dividends. Its FY18-19F dividend yields of 6%-7% (our estimates) are the highest in the sector and among the small-cap contractors.  

“Protasco’s current share price implies that investors would essentially be paying for only its road maintenance division (which accounts for 44% of our end-FY18F RNAV/share of RM2.39) and getting other assets for “free”. 

“Construction, property development, trading/manufacturing and education make up the balance 54% of RNAV. YTD, Protasco’s share price has marginally increased by 0.7%, compared to the stellar 14% to 100% re-rating of comparable small-cap contractors.  
Read more at https://www.thestar.com.my/business/business-news/2017/10/20/protasco-biggest-proxy-for-govt-road-maintenance-jobs/#hO1Dd0WFl1LVBQgx.99

note 2: http://www.bursamalaysia.com/market/listed-companies/company-announcements/5627397

Changes in Sub. S-hldr's Int (Section 138 of CA 2016)

Particulars of substantial Securities Holder

Details of changes