Protasco announced that its 30% owned associate, PJP Barisan-HCM JV (equity accounted) has been awarded a contract for the management and maintenance of state roads in Sarawak amounting to RM24.6m p.a. spanning 10 years. The contract is subject to a rate review every 3 years with a maximum hike of 7.2%. We estimate the potential cumulative earnings to Protasco from this contract amounts to RM4.8m. Current outstanding orderbook stands at RM513m, translating into a decent cover ratio of 2.0x. Management is actively looking at potential value unlocking strategies for its assets. Post revision of our valuation methodology, we upgrade our rating on Protasco to a HOLD (from Sell) with a higher TP of RM0.31 (from RM0.18) based on 0.45x FY20 BV (-1.5SD). Our TP implies a FY19/20/21 P/E of 13.5x/13.5x/16.3x respectively.

NEWSBREAK

Job win. Protasco announced that its 30% owned associate, PJP Barisan-HCM JV (equity accounted) has been awarded a contract for the management and maintenance of state roads in Sarawak, Package 3 (Mukah Division). The contract amounts to RM24.6m p.a. and spans a period of 10 years, effective from Jan-20 until December-29. The contract is subject to a rate review every 3 years with a maximum hike of 7.2%.

HLIB’s VIEW

Financial impact. Based on (i) Protasco’s 30% stake in the associate, (ii) annual contract revenue of RM24.6m escalating at 5% every 3 years and (iii) a net margin of 6%, the potential cumulative earnings to Protasco from this contract amounts to RM4.8m.

Orderbook. Current outstanding orderbook stands at RM513m, translating into a decent cover ratio of 2.0x to FY18 construction revenue. PPA1M Phase 2 and 4 forms a majority of the outstanding orderbook at 96%. The company is entering FY20 on a cleaner slate after incurring provisions for cost overruns in certain completed projects last year. Going forward the company’s financial performance will continue to be driven by PPA1M Phase 2 project and DID works. The company’s current tenderbook currently amounts to RM1bn consisting of civil servant housing, building and infrastructure projects.

Asset monetisation. Management is actively looking at potential value unlocking strategies. Protasco currently owns 100 acres of landbank in Kajang (79 acres), Pasir Gudang (14.5 acres) and Sandakan (6.7 acres). Based on checks with management the estimated net book value for these assets are RM156m (translates to RM36 psf)

Forecast. Increase FY20-21 earnings by 4.0% and 4.9% respectively after factoring in associate contract win.

Upgrade to Hold, TP: RM0.31. We take this opportunity to switch our valuation methodology to P/B based on 0.45x FY20 BV (-1.5SD). With its ongoing asset monetisation strategy, we feel a P/B valuation methodology better captures the asset value of the company amid an earnings down-cycle period for the company. We think its weak replenishment visibility and a depleting orderbook will continue to weigh on share price. Our TP implies a FY19/20/21 P/E of 13.5x/13.5x/16.3x respectively.

Source: Hong Leong Investment Bank Research - 17 Dec 2019