RM2m loss in 1Q18 was a negative surprise, below ours and consensus expectations of profits. The result disappointment was due to losses for construction (timing gap) and property (no new launches). Road maintenance saw strong PBT growth of 112% YoY but we see risk of lower federal government spending. Cut FY18-19 earnings by 22% and 20%. Downgrade to SELL from Hold with TP of RM0.47 (from RM1.00).

Below expectations. Protasco reported 1Q18 results with revenue of RM157.5m (- 50% QoQ, +19% YoY) and loss of RM2.1m (4Q17: profit of RM8.7m, 1Q17: profit of RM3.3m). Needless to say, the results were below expectations compared to our full year profit forecast of RM35m (consensus: RM44m). The disappointing results were due to the construction and property divisions which were loss making.

Construction in the red… While construction revenue picked up QoQ by 139%, it was still down 54% YoY. Owing to fixed cost incurred, coupled with low revenue, the division sunk back into the red (RM1.3m loss). Note that construction barely broke even in 4Q17. The slow pick up in revenue was due to timing gap between completion of PPA1M Phase 1 and progress ramp up for Phase 2 (RM301m) (now 14% complete). Management guides that work on Phase 4 (RM434m) will only take place in 4Q. We turn cautious on the overall job flow prospects given the change in administration (post GE14) as mega projects are either placed under review or scrapped.

...and property too. Property revenue was almost non-existent given the absence of any new launches last year and YTD coupled with slow inventory sales. Consequently, the division remained loss making (RM2.6m) for the 2nd consecutive quarter. In terms of new launches, management shared that it will be launching (i) shop lots in Pasir Gudang (RM120m) once bookings hit 30%; and (ii) Telipot Apartment, Kota Bahru (RM160m) towards mid-year.

Downside for maintenance? On a brighter note, road maintenance saw revenue and PBT surge strongly by 90% and 112%, respectively. However, we turn slightly cautious on this division as maintenance of federal roads could be scaled back as the new administration attempts to rationalise its expenditure.

Forecast. We cut FY18-19 earnings by 22% and 20%, respectively after imputing (i) lower construction margin; (ii) scaling back orderbook execution; and (iii) lower road maintenance works.

Downgrade to SELL, TP: RM0.47. Aside the earnings cut, we also lower our P/E target from 12x to 7x (at the lower end of its historical range) tagged to FY18 earnings. In view of the results disappointment, coupled with the gloomy sector outlook for contract flows, we downgrade our rating on Protasco from Hold to SELL with TP of RM0.47 (from RM1.00).

Source: Hong Leong Investment Bank Research - 31 May 2018