Protasco sees better outlook on road maintenance, construction jobs
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.