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Wednesday, January 4, 2017
Brokers Report: PROTASCO - An Undervalued Gem
We believe PRTASCO is an undervalued gem, especially for its niche business specialising in roadwork maintenance, which provides a steady income stream, as most of its maintenance works are based on concessions awarded by state and federal governments. Projecting steady earnings growth of 13-3% for FY17-18E backed by both its existing and maintenance orderbooks, and we also like them for their decent dividend yield of 6.1% for FY17. TRADING BUY with a TP of RM1.52 based on 11x FY17E PER.
Contractor with a niche. PRTASCO is a well-established player in the construction industry where its forte is in road maintenance works on top of several business divisions (refer to business segments). Its road maintenance division made up 52% and 69% of FY15 revenue and PBT, respectively; while pre-tax margins are superior at an average of 10-13% compared to the conventional construction pre-tax margin that averages around 6% (refer to overleaf for details).
Gunning for more maintenance concessions. As of 9M16, PRTASCO has an outstanding maintenance orderbook of c.RM4.4b that would last until 2026 contributing c.RM400m p.a. to its top line. These maintenance orderbook comprise concessions awarded by both states and federal governments to carry out routine and periodic road maintenance work over the awarded concession period. Looking forward, management indicate that their core focus is still road maintenance works, and they are eyeing more sizeable concessions, which could potentially contribute another c.RM100.0m-RM200.0m p.a. to its top line. That aside, they are currently bidding for c.RM300.0m worth of state, rural and municipal road maintenance contracts.
A bite size replenishment target. For its construction division, management is targeting a replenishment of RM500.0m for FY17 that comprises infrastructure and government housing projects such as PPA1M. We believe that management’s target is not overly ambitious and is highly achievable given its tender book size of c.RM5.0b. Furthermore, PRTASCO have a strong track record with PPA1M project, in which they have thus far bagged two phases of PPA1M with a cumulative value of c.RM900.0m.
Decent dividend pay-out ratio. Over the past 5 years, PRTASCO had been consistently paying out >60% of its net profit as dividends, albeit not having a formal dividend policy. We note that it is at the higher end in terms of pay-out among contractors. At our conservative dividend payout ratio (DPR) assumption of 50%, we would be expecting DPS of 6.9 sen for FY17, which translates to a yield of 6.1% - far superior compared to its small-mid cap peers’ (KERJAYA, MITRA, GADANG) average of 2.9%. While net gearing may seem high at 1.2x as of 9M16, this is due to the project financing for Phase 1 of PPA1M of which management is expecting a bullet repayment of c.RM525m from the Government upon completion.
Growth to resume. 9M16 NP declined by 10% as its pre-tax margin was compressed by 3ppt to 9% due to non-renewal of two state road maintenance contracts during the year. We are projecting net profit growth of 13-3% for FY17-18E Our FY17-18E growth of 13-3% is backed by: (i) its outstanding orderbook of c.RM742.0m with replenishment assumptions of RM500.0m per annum for FY17-18E, (ii) outstanding maintenance orderbook of RM4.4b that would last them for another 10 years, and (iii) property unbilled sales and inventories worth RM113m, while growth assumptions for other divisions are flattish.
Trading Buy. We value PRTASCO at RM1.52 based on 11x FY17E PER that is within our mid-cap peers’ range of 11x-13x. We see room for upgrade in valuations should PRTASCO be able to pare down its debts upon receiving the bullet repayment for its PPA1M project by end of 1H17, which would bring its net gearing into net cash. Furthermore, the potential re-rating catalyst for PRTASCO would be: (i) higher-thanexpected replenishments >RM500.0m, (ii) potential extra emergency road maintenance works to be carried out should GE14 is called in 2017. Currently, its dividend yield of 6.1% is still far more superior compared to its mid-cap peers’ average of 2.9%.
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