Pro­tasco sees bet­ter out­look on road main­te­nance, con­struc­tion jobs

The Star Malaysia - StarBiz - - Companies & Strategies -

WHILE de­clin­ing earn­ings and a lag­ging share price have been hold­ing Pro­tasco Bhd back, the con­struc­tion out­fit does seem to have a brighter out­look.

The Main Mar­ket-listed en­tity ex­pects its fi­nan­cials to im­prove from the fi­nan­cial year of 2018 (FY18) on­wards, pri­mar­ily driven by stronger con­tri­bu­tions from its key busi­ness seg­ments - road main­te­nance and con­struc­tion.

Pro­tasco, which has a mar­ket cap­i­tal­i­sa­tion of nearly RM460mil, termed its cur­rent FY17 as a tran­si­tion pe­riod, with stronger growth prospects ahead.

The com­pany’s earn­ings have been de­clin­ing since FY16, largely due to non-re­newal of road main­te­nance con­ces­sion con­tracts and the de­lay in com­mence­ment of the civil ser­vants hous­ing project (PPA1M) phase 2.

As for the first half of FY17 (1H17), its net profit dived by nearly 60% to RM11.2mil from RM27.71mil a year ear­lier. Its top line also nar­rowed sig­nif­i­cantly, down by 33% year-on-year to RM351.93mil.

Share price-wise, the counter posted a rather lack­lus­tre per­for­mance, de­clin­ing by ap­prox­i­mately 4.7% over the last one year.

In­ter­est­ingly, three re­search houses have ini­ti­ated cov­er­age on Pro­tasco with buy calls, two of them as re­cent as within the last two weeks.

The pos­i­tive sen­ti­ment is un­der­pinned by Pro­tasco’s out­stand­ing order book size of about RM5­bil.

As at June 30, the com­pany’s out­stand­ing con­struc­tion order book stood at RM720mil, enough to keep Pro­tasco’s con­struc­tion di­vi­sion busy for the next two years.

Mean­while, its road main­te­nance out­stand­ing order book stands at RM4.2bil which will last un­til year 2026.

Speak­ing with StarBizWeek, Pro­tasco ex­ec­u­tive vice chair­man and group man­ag­ing di­rec­tor Datuk Seri Ir Chong Ket Pen ( pic) is san­guine for a re­bound in Pro­tasco’s fi­nan­cial per­for­mance.

“We have started PPA1M Phase 2 in July this year and we are ex­pect­ing the project to con­trib­ute pos­i­tively to our con­struc­tion seg­ment from H2’17.

“With re­gards to our main­te­nance di­vi­sion, the job or­ders have been is­sued and are ex­pected to in­crease the main­te­nance seg­ment’s con­tri­bu­tion mov­ing for­ward. FY16 and FY17 are tran­si­tion years for Pro­tasco and we ex­pect growth from FY18 on­wards,” he tells StarBizWeek via an email in­ter­view.

Chong, who co-founded Pro­tasco with Datuk Ir Has­nur Rabi­ain Is­mail in 1991, is the sin­gle largest share­holder in the com­pany. He holds an eq­uity in­ter­est of about 25% in Pro­tasco.

The com­pany, which has op­er­a­tions in six states, dom­i­nates main­te­nance of fed­eral and state roads in Malaysia. As per the sta­tis­tics from the Pub­lic Works Depart­ment in 2016, Pro­tasco alone con­trols about 43% mar­ket share for fed­eral roads main­te­nance.

Over­all, Pro­tasco op­er­ates six road main­te­nance con­ces­sions com­pris­ing two state road main­te­nance con­tracts, two fed­eral road con­tracts and two ru­ral road con­tracts.

Be­ing Malaysia’s largest road main­te­nance ser­vice provider, Pro­tasco en­joys re­cur­ring in­come con­tri­bu­tions from the seg­ment, with at least 60% of its earn­ings are re­cur­ring in na­ture.

CIMB Re­search, which ini­ti­ated cov­er­age on Oct 19, opines that Pro­tasco has high chances of clinch­ing a big­ger share of the gov­ern­ment’s ex­pen­di­ture on road main­te­nance.

“Pro­tasco is the big­gest play on gov­ern­ment road main­te­nance con­tracts, with a dom­i­nant 43% mar­ket share in the road main­te­nance space in 2016.

“It is the only listed com­pany with di­rect ex­po­sure to this seg­ment and stands to ben­e­fit from up­trend in gov­ern­ment ex­pen­di­ture on road con­struc­tion and main­te­nance,” says the re­search house.

Cur­rently, Pro­tasco is eye­ing pro­jects worth over RM5­bil, which in­clude build­ing, hous­ing, high­way and in­fra­struc­ture pro­jects.

Pro­tasco’s Chong says: “Out of Pro­tasco’s cur­rent ten­der book for con­struc­tion which is more than RM5­bil, the man­age­ment is con­fi­dent of se­cur­ing some of the pro­jects ten­dered.

“Min­i­mum an­nual re­plen­ish­ment of con­struc­tion order book is RM500mil.

“Apart from con­struc­tion, Pro­tasco is also bid­ding for road main­te­nance con­tracts for state roads, ru­ral and mu­nic­i­pal roads and build­ing main­te­nance con­tracts.

“With re­gard to con­tracts abroad, Pro­tasco is sourc­ing for in­fra­struc­ture jobs via gov­ern­ment-to-gov­ern­ment (G2G) ba­sis in Bangladesh, Sri Lanka and Nepal”.

Apart from the road main­te­nance and con­struc­tion seg­ments, Pro­tasco is also in­volved in prop­erty devel­op­ment, trad­ing and man­u­fac­tur­ing as well as education via its In­fra­struc­ture Uni­ver­sity Kuala Lumpur (IUKL).

Its prop­erty devel­op­ment busi­ness, which has seen con­tin­ued de­cline in sales over the past four years, is ex­pected to grad­u­ally re­cover as Pro­tasco plans to lever­age on the ris­ing de­mand for af­ford­able hous­ing.

The group will be launch­ing af­ford­able prop­erty units at its De Cen­trum City devel­op­ment, priced at RM300,000 to RM350,000 per unit.

The first phase of this RM600mil devel­op­ment is tar­geted for launch by the end of this year.

The counter has gen­er­ally been on a down­trend over the last six­teen months, pri­mar­ily at­trib­uted to Pro­tasco’s de­clin­ing fi­nan­cial per­for­mance.

As of Fri­day, Pro­tasco shares closed at

RM1.17 apiece.

How­ever even at this price, the stock is trad­ing at a de­mand­ing his­tor­i­cal price earn­ings (PE) mul­ti­ple of 17.4 times and at a for­ward PE of 15.4 times, ac­cord­ing to Bloomberg data.

Still, CIMB Re­search reck­ons that the com­pany’s shares cur­rently trade at de­pressed lev­els, with po­ten­tial up­ward cat­a­lysts await­ing mov­ing for­ward.

“Its cur­rent share price is 19% lower than the pre­vi­ous high in 2016 and at a mas­sive 55% dis­count to end-FY18 re­vised net as­set value (RNAV).

“We be­lieve most of the neg­a­tives are re­flected in the cur­rent share price.

“The stock could be catal­ysed by a re­vival in con­tract flows, elec­tion plays and re­vival in af­ford­able hous­ing con­tracts,” says CIMB Re­search.

Ac­cord­ing to the re­search house, Pro­tasco’s cur­rent share price im­plies that in­vestors would es­sen­tially be pay­ing only for its road main­te­nance di­vi­sion and get­ting other as­sets for free of charge.

“Year-to-date, Pro­tasco’s share price has marginally in­creased by 0.7%, com­pared to the stel­lar 14% to 100% re-rat­ing of com­pa­ra­ble small-cap con­trac­tors,” the re­search house says.

AmIn­vest­ment Bank Re­search, CIMB Re­search and Hong Leong In­vest­ment Bank Re­search have is­sued target prices of RM1.33, RM1.43 and RM1.20 re­spec­tively.

“Con­sid­er­ing the strong order re­plen­ish­ments for other small and mid cap pure con­trac­tors in the last 12 months, we view Pro­tasco as a sec­tor lag­gard.

“We be­lieve Pro­tasco’s share price will play catch-up with its peers on the back of an im­prov­ing earn­ings out­look for H2’17 and FY18,” says CIMB Re­search.

By GANESHWARAN KANA ganeshwaran@thes­

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