This article first appeared in The Edge Malaysia Weekly on November 19, 2018 - November 25, 2018

PROTASCO Bhd shares hit a low of 33.5 sen apiece last month, their lowest level since January 2010. The going has not improved  since with the counter closing at 35 sen last Thursday, giving the company a market capitalisation of RM173.2 million.

“It is critically depressed,” Protasco managing director Datuk Chong Ket Pen says of the share price performance.

Protasco’s share price started to decline in April and has since shed more than 55% of its value.

Considering that the stock was trading at less than half its net asset value per share of 75.1 sen as at end-June and an earnings multiple of a mere 12.5 times, his sentiment is understandable.

To recap, the diversified company is involved in road and highway maintenance, construction, property development, engineering services, trading and manufacturing and education, among other things. It has road maintenance contracts in four states in the peninsula, a concession that runs for another eight years for federal roads, and a 10-year concession in Sarawak.

“Our (road) maintenance side is still doing fine and our construction side still has ongoing projects,” Chong says.

The company’s depressed share price could be attributed to two successive quarters of losses, which is rare for a concessionaire.

Not helping matters is that its cash hoard is depleting fast — cash and bank balances had shrunk to RM49.54 million at end-June, down 55.58% from RM111.53 million at the end of last year, while  deposits with licensed banks had dropped to RM11.63 million from RM106.61 million.

To make things worse, receivables and amounts owed by contract customers exceeded RM545 million as at end-June — a level that would make most investors jittery. Of this amount, RM140.69 million was owed by contract customers compared with RM37.81 million a year ago. 

However, Chong explains that the high level of receivables is because of government payments that have been put on hold.

“To me, it is a transition ... Malaysia chose a new government, [and] the old system is adjusting with the new minister. It will take them a few months [to settle payments owing to Protasco],” he says.

The company’s cash hoard has been utilised as retention sums for its maintenance contracts,  Chong explains. “When the government is in a position to pay up the retention sum, we should get back our cash again.”

In line with the weak sentiment, the company’s financial results have failed to impress. In the six months ended June 30, it suffered a net loss of RM3.1 million on revenue of RM399.65 million in contrast to a year ago, when it chalked up a net profit of RM11.2 million on revenue of RM351.93 million.

“Our bottom line was weak partly because of the cost of certain projects we handled. Another area that impacted us was education. There were no MARA (Majlis Amanah Rakyat student) loans, no PTPTN (National Higher Education Fund or Perbadanan Tabung Pendidikan Tinggi National) loans, and students from China stopped coming. This caused some losses at our education arm,” Chong says.

Apart from that, he adds, interest costs for inventory and expenses also brought about losses. “We are going through some rationalisation, cost optimisation. We hope next year we will grow again. It is a temporary setback, it is just this year ... we are trying to make Protasco more focused on construction and maintenance.”

In an end-August report, CIMB Investment Bank Research says Protasco would rake in RM14.25 million in net profit on revenue of RM828 million in its current financial year — meaning a turnaround in the second half — and RM21.98 million in net profit on revenue of RM845 million in FY2019.

The research house has a “reduce” call on Protasco and a target price of 40 sen.

“We reiterate that Protasco is highly dependent on government contracts ... with no major jobs secured year to date, its RM1.1 billion outstanding construction order book as at end-March will  continue to deplete over the coming quarters.

“In the new environment where the government is phasing out directly negotiated contracts and pursuing competitive open tenders, prevailing tender margins could be compressed,” it points out.

According to Chong, Protasco’s order book is worth between RM600 million and RM700 million and should keep it busy for the next one to two years. Its tender book is in the RM600 million to RM700 million range as well.

Chong disagrees with the notion that Protasco may not fare well with open tenders.

“I don’t think that [open tenders] will really affect [us] as things will be more transparent. To me, the important thing is that it has to be across the board and everybody is equal. In an open tender, if I lose, I have to accept it, but in the earlier model, I may be good but I still cannot win jobs.

“We stand a good chance, we are going all out ... We have won jobs in Sri Lanka via open bids. In Bangladesh, we won jobs with our partner on open-tender basis. In Sri Lanka, all the big boys came in but we won. So, we have no qualms about going for open tenders,” he says.

For Protasco’s other businesses, apart from maintenance and construction, Chong says the plan is to tie up with strategic partners. But whether these plans and strategies bear fruit remains to be seen.

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