Results Highlights

• Protasco’s 4Q2017 net profit surged 22.8x Y.o.Y to RM8.7 mln, lifted by higher contributions from both the maintenance and engineering services segments, coupled with lower operating expenses. Revenue for the quarter gained 19.3% Y.o.Y to RM313.6 mln.

• For 2017, however, net profit slipped 28.8% Y.o.Y to RM30.2 mln. Revenue for the year fell 12.9% Y.o.Y to RM966.8 mln. The reported earnings only amounted to 87.4% of our 2017 earnings forecast of RM34.5 mln, whilst the reported revenue came slightly ahead of our expectations, amounting to 103.5% of our full year estimate of RM934.2 mln. The variance in earnings was due to higher minority interest of RM20.3 mln vs. our forecast of RM15.5 mln. On the pretax level, the reported pretax profit of RM71.7 mln was within our estimate, amounting to 103.2% of our forecast.

• Segmentally, the maintenance division’s pretax profit soared 706.0% Y.o.Y to RM25.0 mln on the back of increases in periodic works. The engineering services segment’s pretax profit stood at RM3.4 mln vs. a pretax loss of RM0.2 mln in the previous corresponding quarter on higher billings for soil investigation services work. The trading and manufacturing segment pretax profit jumped 155.6% Y.o.Y to RM1.7 mln, while the education segment’s pretax profit rose 51.6% Y.o.Y to RM2.3 mln on a more prudent cost management.

• On the flipside, its construction segment pretax profit slumped 92.5% Y.o.Y to RM0.9 mln due to completion of the PPA1M Phase 1 project in 1Q2017, while the property development segment remains in the red with a pretax loss of RM3.1 mln as there were no new launches in 2017. In the meantime, Protasco returned to net cash position of RM24.5 mln in 2017. A dividend of 3.0 sen per share was declared.

Prospects

With the incorporation of a single construction project secured in 4Q2017, the group’s construction orderbook replenishment for 2017 stood at RM400.2 mln. Moving forward, its’ outstanding construction orderbook of approximately RM1.10 bln (RM800.0 mln for building projects and RM300.0 mln for roads and bridges projects), translating to a cover ratio of 6.2x of 2017’s construction revenue of RM176.9 mln will provide earnings visibility over the next two years. For 2018, we expect the group to secure additional construction contracts worth RM300.0 mln from a construction tenderbook of over RM5.00 bln.

Another bread and butter business, the maintenance segment with an outstanding orderbook of approximately RM4.61 bln (inclusive of the recent renewal to maintain Federal roads in Sarawak) will see earnings visibility until August 2028. Protaso will also continue to actively bid for new road maintenance projects worth RM300.0 mln.

As of 2017, the group has a total landbank of 100.2 ac. in Selangor, Johor and Sabah. In view of the soft property market, no further launches are in the cards in 2018 for De Centrum project. Elsewhere, the group is planning to launch affordable apartments – Telipot Apartment, in Kota Bahru by 2Q2018 with GDV of RM160.0 mln. Moving forward, the group’s unsold units from De Centrum Unipark Phase 2, comprising of 20-storey condominiums (Block C & D) valued at RM31.0 mln will be recognised progressively upon the completion of sales.

Valuation and Recommendation

We trimmed our earnings forecast by 12.4% and 7.6% to RM37.4 mln and RM39.0 mln for 2018 and 2019 respectively on the back of higher minority interest as the pickup in earnings from the maintenance segment are derived from subsidiaries that are not 100% owned by the group. Consequently, we also downgrade Protasco to a HOLD recommendation with a lower target price at RM1.10 (from RM1.20).

We arrive our target price on a sum-of-parts basis by ascribing an unchanged target PER of 11.0x to its 2018 construction earnings as well as a target PER of 8.0x (unchanged) to its 2018 concession and engineering services’ earnings. Its education and trading units’ valuations remain pegged at target PERs of 6.0x respectively due to their smaller scale businesses, while its property development division’s valuation is derived from ascribing an unchanged 0.6x to its BV.

Risks to our forecast and target price include inability to attain the targeted construction orderbook replenishment amount, delays in project completion and failure or delay in concession contract renewals. Further tightening of monetary policies will also be unfavourable to its property development business.

Source: Mplus Research - 28 Feb 2018