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Friday, November 25, 2016

Brokers Report: PROTASCO - Still Humming Along

Maintain BUY recommendation with higher target price (TP) of RM1.75

  • Protasco’s 3Q2016 net profit declined 7.0% Y.o.Y to RM14.3 mln, dragged down by the weakness in the maintenance segment due to the non-renewal of two state roads maintenance contracts, coupled with lower contributions from its property development segment with the near completion of Phase 1 of De Centrum project. Revenue for the quarter fell marginally by 0.4% Y.o.Y to RM302.8 mln.
  • Cumulative 9M2016 net profit slipped 9.1% Y.o.Y to RM42.0 mln. Revenue for the period fell marginally, by 0.9% Y.o.Y to RM826.1 mln. Despite that, the reported earnings came slightly above our expectations, accounting to 77.2% of our previous full year net profit forecast of RM54.4 mln. The reported revenue, meanwhile, only amounted to 71.5% of our previous revenue forecast of RM1.16 bln.
  • Segmentally, the maintenance division’s 3Q2016 pretax profit slumped 66.7% Y.o.Y to RM8.9 mln on the non-renewal of two state roads maintenance contracts. The construction segment’s pretax profit, however, surged 5.1x to RM0.9 mln on higher billings from Phase 1 of the PPA1M project, which is at 96% completion.
  • Its property development segment’s pretax profit jumped 180.6% Y.o.Y to RM6.2 mln on minor cost adjustment after the completion of Phase 1, while Phase 2A is at 81.0% completion. The engineering services’ segment pretax profit sank 55.4% Y.o.Y to RM33,000 on lower geotechnical and soil works. The trading & manufacturing segment’s pretax profit added 64.1% Y.o.Y to RM0.9 mln, while the education segment’s pretax profit soared 320.9% Y.o.Y to RM0.8 mln on an increase in student intake. An interim dividend of 3.0 sen per share was declared.


We note that Protasco has secured its first major construction contract in 2016 through a joint-venture, valued at RM315.8 mln for works relating to the Sungai Besi-Ulu Kelang Expressway. Subsequently, the company’s outstanding construction orderbook of approximately RM900.0 mln (implying a relatively high 3.6x construction orderbook cover ratio vs. 2015’s construction revenue of RM247.8 mln), will continue to anchor the segment’s earnings growth until February 2019, backed by the aforementioned project and two relatively large scale PPA1M projects. Over at the maintenance segment, Protasco managed to clinch the state maintenance work for Kelantan state over a two year period for RM25.7 mln, renewable over the next 10-year period. We think the concession segment is already well supported by an outstanding orderbook of approximately RM4.40 bln which will provide earnings visibility over the next ten years. Meanwhile, we also think that the allocation of RM4.60 bln for the maintenance of state roads under the recent Budget 2017 announcement bodes well for Protasco. On its property development segment, the unbilled sales of RM23.4 mln will be recognised progressively towards the end of 2016 and 1H2017. Going forward, Phase 2B of DeCentrum, which carries a GDV of RM350.0 mln, and slated for launch in 2H2016 could be held back due to the slowdown in the general property market. Moving forward, Protasco aims to launch an affordable housing project with a GDV of RM600.0 mln in 2Q2017 in two phases.

Valuation And Recommendation

As the reported earnings came slightly above our forecast, we raised our earnings estimates for 2016 and 2017 by 8.0% and 7.4% to RM58.8 mln and RM61.9 mln respectively, after adjusting our earnings forecast to account for lower finance cost and lower effective tax rate of 31.0% (previously at 32.5%). Consequently, we maintain our BUYrecommendation on Protasco with a higher target price RM1.75 (from RM1.65). Our target price is derived from rolling over (to 2017) our unchanged target PER of 11.0x to its construction earnings, a target PER of 8.0x (unchanged) to its concession and engineering services’ earnings, while its education and trading earnings remain pegged at target PERs of 6.0x respectively due to their smaller scale businesses. Its property development division’s valuation remains unchanged at 0.6x of its BV. Risks to our forecast and target price include failure to achieve the targeted construction orderbook replenishment amount 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 - 25 November 2016

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