Protasco biggest proxy for govt road maintenance jobs
KUALA LUMPUR: CIMB Equities Research has initiated coverage on Protasco
which is the biggest play on government road maintenance contracts, with a dominant 43% market share in the road maintenance space in 2016.
The research house said on Friday the company 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 (up more than 200% in 2017F to RM5.9bil).
“Its construction division is vying for RM4.6bil in new contracts, typically rolled out prior to the General Election. We think its earnings will recover in FY18F,” it said.
CIMB Research believes Protasco offers an attractive risk-reward profile in FY17-18F. Initiate with an Add and a RM1.43 target price (current price RM1.08), based on a 40% discount to end-FY18F realised net asset value (RNAV) implied end-CY18F target price-to-earnings (P/E) of 14.3 times.
“At eight to 11 times CY18-19F P/E, Protasco trades at a 14-18% discount to the P/E valuations of selected small/mid-cap contractors. Key downside risks to our call are weak earnings delivery, poor execution and job delays,” it pointed out.
CIMB Research considers FY16 and FY17F transition years for Protasco’s earnings prior to contribution from road maintenance and construction stepping up to reflect higher-margin recurring earnings from road maintenance (RM4.2bil outstanding order book) and billings for its high RM718mil construction order book.
It forecasts earnings recovery in FY1819F, with three-year earnings per share (EPS) compounded annual growth rate (CAGR) of 10% (FY16-19F).
The research house pointed out the share price was 19% lower than the previous high in 2016 and at a massive 55% discount to end-FY18F RNAV.
“We believe most of the negatives (disappointing FY16 results, likely sustained weak earnings in FY17F and legacy issues, see are reflected in current share price.
“The stock could be catalysed by: 1) a revival in contract flows, 2) election plays, 3) revival in affordable housing contracts (Protasco’s niche area),” it added.
CIMB Research also noted that the company’sFY18-19F dividend yields of 6%-7%, the highest in the sector Protasco’s dividend appeal is supported by stable earnings from its road maintenance concessions.
“We forecast a dividend payout ratio of 60% in FY17-19F (consistent with historical ratios) and exclude potential special dividends. Its FY18-19F dividend yields of 6%-7% (our estimates) are the highest in the sector and among the small-cap contractors.
“Protasco’s current share price implies that investors would essentially be paying for only its road maintenance division (which accounts for 44% of our end-FY18F RNAV/share of RM2.39) and getting other assets for “free”.
“Construction, property development, trading/manufacturing and education make up the balance 54% of RNAV. YTD, Protasco’s share price has marginally increased by 0.7%, compared to the stellar 14% to 100% re-rating of comparable small-cap contractors.
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