18 March 2014 | Initiating coverage

Protasco Bhd Initiating with BUY The road and dividend masters Target Price (TP): RM2.90

INVESTMENT HIGHLIGHTS • Initiating coverage of Protasco Berhad (Protasco), a road RETURN STATS maintenance and construction player, with a BUY at a target Price (17th March 2014) RM1.64 price of RM2.90. Target Price RM2.90 • Total potential upside is >70%, not including its generous Expected Share Price dividends. Dividend track record is good. +76.8% Return • Orderbook currently stands at RM709m, but may hit RM1b this year. Earnings catalyst to come from property and its foray into Expected Dividend Yield +8.5% oil & gas production business in Indonesia. Expected Total Return +85.3%

Impressive track record. Protasco was founded in 1991 by Dato’ Hasnur Rabiain bin Ismail and the present Group Managing Director, STOCK INFO Dato’ Sri Ir Chong Ket Pen. The group’s key clients include Projek KLCI 1,815.16 Penyelenggaraan Lebuhraya Bhd and Jabatan Kerja Raya. 5070 / PRTA Bursa / Bloomberg Six core principle activities. Protasco is principally involved in six MK businesses: (i) construction; (ii) maintenance; (iii) property development; Main / Board / Sector (iv) engineering and consultancy services; (v) education and; (vi) trading Construction and manufacturing. The group’s core earnings are derived from the Syariah Compliant Yes

recurring income from roadwork maintenance concessions for federal Issued shares (mil) 332.8 and state roads in . Par Value (RM) 0.50 Solid PATANCI growth. Protasco’s revenue grew at a solid 6-year compounded annual growth rate (CAGR) of +9.1%, nearly hitting the Market cap. (RM’m) 545.8 RM1b mark in 2013. Meanwhile, its profit after tax and non-controlling Price over NTA 1.30x interest (PATANCI) continues to show stable growth, registering a 6- 52-wk price Range RM1.00–RM1.68 year CAGR of +11%. Beta (against KLCI) 0.78x Catalysts/risks: Going forward, the group’s earnings will be derived from: (i) strong construction jobs in the pipeline; (ii) continuation from 3-mth Avg Daily Vol 1.84m maintenance concession earnings; (iii) integrated flagship development 3-mth Avg Daily Value RM2.73m on 100-acre land in Bangi and 14.4-acre land in Pasir Gudang Johor; Major Shareholders: (iv) profit guarantee from oil & gas business and; (v) healthy balance sheet. Downside risks to our target price include (i) slowdown in property Ket Pen Chong 23.59% market; (ii) scaleback of government jobs and; (iii) delay in Por Yee Tey 17.77% implementation of 10th MP projects. Penmacorp S/B 9.05 % Initiating coverage with BUY. We are initiating coverage of Protasco with a BUY recommendation on a TP of RM2.90. Our TP is derived on Protasco Bhd 5.21%

an FY15 sum-of-parts valuation, pegging its construction and road maintenance concessions earnings at PER15 of 9x, property development business with RNAV of RM503.7mil (after applying a 20% discount), and all other business segments at PER15 of 7x.

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

MIDF EQUITY BEAT Tuesday, 18 March 2014

INVESTMENT STATISTICS FYE Dec (RM’m) FY11 FY12 FY13 FY14F FY15F Revenue (RM‘m) 696.0 793.9 972.2 1,196.0 1,396.0 EBIT (RM’m) 74.3 108.6 104.5 174.5 223.7 Pre-tax Profit (RM’m) 72.2 106.6 101.6 171.7 220.6 Net Profit (RM’m) 31.8 37.5 48.6 79.4 102.0 EPS (sen) 9.6 11.3 14.6 23.9 30.7 EPS growth (%) -32.4 17.7 29.8 63.3 28.5 PER(x) 17.1 14.6 11.2 8.4 6.9 Net Dividend (sen) 8.0 14.0 10.0 12.0 14.0 Net Dividend Yield (%) 4.9 8.5 6.1 7.3 8.5 Source: Company, Forecasts by MIDFR COMPANY BACKGROUND Impressive track record. Protasco was founded in 1991 from humble beginnings in the road construction business. The business was spearheaded by HCM Engineering Sdn Bhd (HCM), championed by Dato’ Hasnur Rabiain bin Ismail and the present Group Managing Director, Dato’ Sri Ir Chong Ket Pen. The group was involved in subcontracting works for clients like Projek Penyelenggaraan Lebuhraya Bhd (PROPEL) and Jabatan Kerja Raya (JKR) in the early years. Over the past 22 years, the group has gradually built up an impressive track record in road construction rehabilitation. It has also progressively expanded its scope of services to include maintenance works. Overall, it has completed more than RM3b worth of road and maintenance projects, both domestically and internationally.

Listed in 2003. With its integrated specialty in road construction, rehabilitation and maintenance works, it has paved the way for its listing on the Main Board of Bursa Malaysia on 8th August 2003. We believe that Protasco will continue to strive further on the back of the extensive international alliance and on-going implementation of infrastructure projects under 10th Malaysia Plan.

Exhibit 1: Protasco’s corporate structure

Source: Company data, MIDFR 2

MIDF EQUITY BEAT Tuesday, 18 March 2014

BUSINESS OPERATIONS Six core activities. Protasco is principally involved in the following businesses: (i) construction; (ii) maintenance; (iii) property development; (iv) engineering and consultancy services; (v) education and; (vi) trading and manufacturing. Core earnings are derived from the group’s recurring income from road maintenance concession of Malaysia federal and state roads. This key segment accounted for approximately 60% of its FY13 net profit while the group’s key earnings growth comes from property development on its solely owned 100-acre land in Bangi, coupled with construction business. Its other business segments’ contributions to group earnings are stable.

Roadwork specialist. The group’s road construction activities are undertaken by its subsidiary HCM. Notable road construction and rehabilitation projects undertaken and successfully delivered include works on the KLIA expressway, road construction from Kuala Perlis to Changlun, construction, rehabilitation and upgrading of road from Muar to Melaka and Jalan Alor Setar - Kuala Nerang - Durian Burung in Kedah, upgrading and rehabilitation of road from Kapar to Sabak Bernam and Klang to in , and road maintenance on Tarhuna - Ben Waled Road in Libya.

Concession agreement. Through HCM and Roadcare (M) Sdn Bhd (Roadcare), the group is the country's leader in road maintenance specifically in various road pavement techniques. Given its vast experience in this line, it has been entrusted for two 15-year federal road maintenance concessions and three 7-year contracts for the maintenance of state roads in Selangor, Terengganu and Perak (see exhibit 2). The two 15-year federal road maintenance concessions cover federal roads in the states of Selangor, Pahang, Terengganu, Kelantan and divisions of Sibu, Mukah and Bintulu in Sarawak.

Exhibit 2: Road Maintenance Concessions

Concessions Length (km) Period (year) Federal Roads Pahang, Terengganu, Kelantan & Selangor 7,104 2001-2016 Federal Roads Sarawak 478 2003-2018 State Roads Selangor n.a. 2009-2015 State Roads Terengganu n.a. 2010-2016 State Roads Perak n.a. 2013-2019 Source: Company data, MIDFR

Engineering & consultancy gig small, but yields high margins. Led by its wholly-owned subsidiary, Kumpulan Ikram Sdn Bhd (KISB), the group has developed and carved a niche in providing a wide range of engineering and consultancy services to complement its construction business that suits local road construction. It is also sought after for solutions pertaining specifically to landslides, pavement and structural failures. Protasco acknowledges that most of the contracts awarded for this segment are small in value but typically yields high pre-tax margin of more than 15%. Its most recent job, undertaken by Ikram Premier Consulting, has certified the International Airport 2 to be safe and ready to be commissioned on 2 May 2014.

Upping the ante in property development. Protasco ventured into the property development arena four years ago by completing its maiden project, the Unipark Condominiums at Unipark Suria on its solely owned 100-acre land in Bangi, Selangor. The successful completion of this project has paved the way for the group to embark on larger property development projects. Its latest integrated flagship development, De Centrum City (see exhibit 3) aims to develop its remaining undeveloped 85-acre land in Bangi, comprising commercial, residential, educational, convention centre, hotel and modern lifestyle attractions. This new urban development project has a sizeable projected Gross Development Value (GDV) of RM10b with a development period of 15 years (2012-2026). In 2012, the group launched Phase 1 on a 4.5-acre land, worth RM250m (see exhibit 4) which is now still under construction and scheduled for completion in 2015. The project is made up of service apartments, small office home office (SOHO) and a neighbourhood mall, which has been well received by buyers with a take up rate of 86% as of Feb 2014.

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Exhibit 3: Proposed De Centrum City

Source: Company data, MIDFR

Exhibit 4: Phase 1 of De Centrum City

Source: Company data, MIDFR

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Tertiary education service provider. Protasco has developed 15-acres of the 100-acre Unipark Suria for its own Infrastructure University Kuala Lumpur (IUKL), offering quality education in various fields. Currently, the IUKL community comprises 4,000 students from more than 50 countries and has extensive international partnering with universities from the United Kingdom, United States, Australia, New Zealand, Ireland, Germany, The Netherlands, and The People's Republic of China. Its student population now comprises 40% international and 60% local students. While we believe that the group has its own best-in-class education, we also understand that it provides training courses to groom small Bumiputera contractors that have done sub-contracting works for the group.

Other business activities. Apart from abovementioned operations, the group’s trading arm specialises in trading and distribution of construction materials and various infrastructure related products. Not less than 75% of its product is purchased for its own construction. Its product ranges from pavement related materials to construction building material, petroleum based products, highway safety products and equipment. FINANCIAL REVIEW Solid PATANCI growth. Protasco has generated a solid 6-year revenue CAGR of +9.1%, reaching revenue of RM972.2m in FY13. Meanwhile, its profit after tax and non-controlling interest (PATANCI) 6-year CAGR grew an impressive +11%. The growth in revenue and PATANCI are undoubtedly linked to its robust road construction and maintenance projects. Of late, growth has also been contributed by strong progress billings from the property development segment. During last five years, it also experienced a sustainable PATANCI margin mainly due to improvement in the construction costs and high profit margin for some projects.

Exhibit 5: PATANCI and Margin Trend

Source: Company data, Forecasts by MIDFR

Consistent dividend payout, comfortably backed by earnings and solid cash hoard. Protasco has declared a first interim dividend of 4.0sen per share in November last year and we are anticipating the group to announce a final dividend of 6.0sen, raising its total dividend payout to 10.0sen per share for FY13. We are not surprised with its relatively high dividend payment in the past years as the group has a strong cash position. We believe that moving forward, the group’s solid earnings growth coupled with its relatively low debt and high cash reserves will be able to reward investors with a consistent dividend payout.

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Exhibit 6: Dividend Payout Trend

Source: Company data, Forecasts by MIDFR INVESTMENT THESIS Strong construction jobs in the pipeline. The group’s outstanding construction orderbook stands at RM709m and with a burn-rate of around two to three years. We believe that Protasco could also expand its orderbook with another few projects this year worth RM300m from roads infrastructure projects under 10th Malaysia Plan, including the Pan- Borneo Highway project and roads upgrading works. In the Budget 2014, the Government has allocated RM0.5b and RM1b for the Pan-Borneo Highway and for nationwide rural roads network upgrades respectively. Its earnings growth is also likely to be supported by large-scale public housing projects such as PR1MA and PPA1M going forward.

Exhibit 7: Construction outstanding orderbook Projects Outstanding (RM'm) Road Upgrading in Kuala Nerang, Kedah (Total: RM37m) 7.0 Road and Drainage Works, Desaru, Johor (Total: RM51m) 29.0 Road works in Zone 2A, Sarawak (Total: RM23m) 6.0 Project Perumahan Awam 1 Malaysia (PPA1M), 579.0 PR1MA projects in Perak & Negeri Sembilan 88.0 TOTAL 709.0 Source: Company data, MIDFR

Maintenance concession will be renewed. We understand that there were 11 players which submitted bids to vie for the soon-to-be expired major road maintenance concession for federal roads covering Pahang, Terengganu, Kelantan and Selangor. Nonetheless, we believe that the group is well positioned to renew its road maintenance concession upon expiry given its vast experience in handling road maintenance works and its strong partner with Bumiputera contractors. The group has also submitted a Letter of Intent for the extension of this expiring road maintenance concession last year and is confident in receiving a Letter of Award in the medium term. Thus, we are expecting a large portion of the group's earnings to be contributed from this renewal.

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Exhibit 8: Maintenance outstanding orderbook

Concessions Outstanding (RM'm) Federal Roads Pahang, Terengganu, Kelantan & Selangor 560 Federal Roads Sarawak 125 State Roads Selangor 65 State Roads Terengganu 85 State Roads Perak 235 TOTAL 1,070 Source: Company data, MIDFR

De Centrum to be key growth driver for the group. We expect the proposed development of De Centrum to be a key growth driver for the group’s earnings going forward. We view that there will be minimal impact from the various property cooling measures imposed of late on its property development unit as its strength lies in its strategic accessibility, amenities and urban and green design development. De Centrum is strategically situated in the South of Kuala Lumpur and is surrounded by two major highways, namely the North-South Expressway and SILK Highway connecting to all directions (see exhibit 9). Thus, we foresee that there will be growing demand for forthcoming phases (see exhibit 10) of the proposed De Centrum due to better connectivity in the future. Apart from the location, the growing university population will also drive its property demand for student accommodations. In addition, situated just minutes away from the proposed Klang Valley Mass Rapid Transit (KVMRT) Line 1 and 2 (see exhibit 11), we are anticipating this development to stir investors’ interest. As of Feb 2014, its unbilled property sales stood at 80% from completion of the Phase 1 project and the Group is expected to launch new phases worth RM130m this year and RM150m next year.

Exhibit 9: Location of De Centrum

Source: Company data, MIDFR 7

MIDF EQUITY BEAT Tuesday, 18 March 2014

Exhibit 10: Proposed KVMRT alignment

Source: Various media sources, MIDFR

Exhibit 11: De Centrum City Masterplan Layout

Source: Company data, MIDFR

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Spreading its wings to Johor. In addition to property development in the Klang Valley, Protasco is set not to miss the boat on the massive Iskandar development in the Southern Johor region to broaden its earnings base. The group has recently acquired five parcels of 14.4-acre commercial land in Pasir Gudang, Johor for a cost of RM29.6m. We understand that this land will be developed into two phases of mixed development project with a development period of approximately between six and eight years. It is expected to launch the Phase 1 next year with a projected GDV of RM800m.

Profit guarantee in the Oil & Gas business. In January 2014, Protasco officially ventured into the oil & gas industry in Indonesia at a relatively attractive cost of USD22m or RM68.4m through the acquisition of 63% equity interest in PT Anglo Slavic Indonesia (PT ASI) from PT Anglo Slavic Utama (PT ASU). PT ASI owns KST oilfield, which has an estimated reserve of 7.2m barrels of oil and 44.2b cubic feet of gas. Protasco’s exposure in this transaction is well shielded by the listed shares of PT Inovisi Infracom, which have been pledged by PT ASU, with a market value amounting to USD30.3m. This provides 130% security coverage ratio for the following: (i) in the event that the share purchase agreement (SPA) of PT ASI is terminated; (ii) the repayment of Protasco’s advance operating expenditure of USD5m and; (iii) fulfillment of the profit guarantee by PT ASU over a span of four years. Hence, we believe that its investment is well protected with potentially lucrative returns. The group could see a ramp up in the pre-tax profit in the next three years, based on the following profit guarantee schedule.

Exhibit 12: Profit Guarantee

FYE Dec (Year) PBT (USD'm) 2014 2.5 2015 3.5 2016 7.0 2017 9.0 TOTAL 22.0

Source: Company data, MIDFR

Healthy balance sheet. We note that the group is sitting on a large cash pile of RM221.2m (as of December 2013) which should be sufficient for project execution and for acquisition of related businesses without the backing of higher borrowings. Nonetheless, we believe that the group will continue to use its cash to reward shareholders in the range of 10-14sen dividend to investors, translating into a highly attractive yield of 7.2% and 8.4% for FY14 and FY15 respectively. RISKS Slow down in property sales. Although its proposed property development has been well received with very good connectivity to all areas, we do not rule out the possibility that there could be a fall in demand for its some property products. Stiff competition could arise from emerging developments for commercial market including Tun Razak Exchange which will be given specials benefits such as stamp duty exemption, tax holidays and allowances which can create an oversupply and demand for commercial spaces.

Dependency on government jobs. As most of Protasco’s orderbook, if not all, are derived from government related jobs, setbacks such as sluggish job roll-outs and political tussles could adversely affect its construction and road maintenance orderbooks.

Deferment of 10MP projects. 10MP will end in less than 2 years’ time. There are always possibilities of project deferments and delays in project executions which would dampen the group’s construction orderbook replenishments.

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MIDF EQUITY BEAT Tuesday, 18 March 2014

VALUATION AND RECOMMENDATION Initiate coverage with BUY call on attractive valuation. We are initiating coverage on Protasco Bhd with a BUY recommendation on a TP of RM2.90 per share. Our TP is based on FY15 sum-of-parts valuation method. We are valuing its construction and road maintenance concessions at FY15F PER of 9x, property development business with RNAV of RM503.7m (after applying a 20% discount), and all other business segments at FY15F PER of 7x. We are estimating the group to generate earnings of up to more than the RM100m level translating, into 120% earnings growth in the next two years from RM49m in FY13. SUM-OF-PARTS VALUATION

Segments FY15 Earnings (RM'm) Basis Value Construction 35.6 320.1 PER15 of 9x Maintenance 25.8 231.9 Oil & Gas 4.9 Cash 4.9 Property RNAV of RM503.7m on a 20% discount 403.0 Education 1.3 9.4 Trading & Manufacturing 3.1 PER15 of 7x 21.9 Engineering & Consultancy 5.0 35.2 TOTAL 1,026.3

Net cash 225.6

Enlarged diluted sharecap 432.2 Sum-of-parts per share 2.90 Source: Company data, Forecasts by MIDFR

DAILY PRICE CHART

Aaron Tan Wei Min Hafiz Hassan [email protected] 03-2772 1668

Source: Bloomberg, MIDFR

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MIDF EQUITY BEAT Tuesday, 18 March 2014

FINANCIAL SUMMARY Income Cash Flow 2012 2013 2014F 2015F 2012 2013 2014F 2015F Statement Statement Operating Revenue 793.9 972.2 1,196.0 1,396.0 activities Gross profit 208.2 201.4 263.1 307.1 PBT 106.6 101.6 171.7 220.6 Operating profit 108.6 104.5 174.5 223.7 Adjustments for: PBT 106.6 101.6 171.7 220.6 Depr & Amort 25.9 14.3 14.0 19.3 PATANCI 37.5 48.6 79.4 102.0 Interests 2.2 2.7 2.7 3.1 PER (x) 14.7 11.3 8.4 7.0 Others 0.3 -21.1 0.0 0.0 FD EPS (sen) 11.3 14.6 19.6 23.6 Changes in WC: Payout (%) 43.7 32.7 23.3 21.1 Inventories 0.1 -0.1 -3.6 -0.8 DPS (sen) 14.0 10.0 12.0 14.0 Receivables -110.7 -107.2 -14.5 -54.8 Dividend yield (%) 8.5 6.1 7.3 8.5 Payables 26.7 149.7 3.5 51.3 Interest -2.2 -2.7 -2.7 -3.1 Balance Sheet 2012 2013 2014F 2015F Taxes -29.5 -34.3 -55.0 -70.6 Non-current CF from 181.5 177.5 243.5 304.1 19.4 103.0 116.2 165.0 assets Operations PPE 178.8 175.1 241.1 301.8 Investing Others 2.6 2.4 2.4 2.3 activities PPE -22.0 -17.1 -80.0 -80.0 Current assets 517.9 706.2 751.4 858.2 Others 26.5 -13.9 0.0 0.0 CF from Inventories 1.2 1.3 4.9 5.7 4.5 -31.0 -80.0 -80.0 Investments Receivables 255.3 313.2 327.7 382.5 Financing Others 111.8 170.5 170.5 170.5 activities Cash & deposits 149.6 221.2 248.3 299.4 Dividends paid -53.4 -12.1 -39.9 -46.6 Others -9.4 5.2 30.8 12.8 CF from TOTAL ASSETS 699.3 883.7 994.9 1,162.3 -62.8 -6.9 -9.1 -33.8 Financing

Net changes in Share capital 150.0 166.1 202.7 223.4 -38.9 65.1 27.1 51.1 cash Share premium 43.5 64.4 64.4 64.4 Beginning cash 187.1 148.4 221.2 248.3 Treasury shares -2.8 -18.3 -18.3 -18.3 Overdrafts 1.4 7.8 0.0 0.0 MI 46.6 24.7 49.3 82.4 Ending cash 149.6 221.2 248.3 299.4 Others 163.3 183.6 223.1 278.5 Ratios 2012 2013 2014F 2015F TOTAL EQUITY 400.5 420.5 521.1 630.3 Profitability ratios Non-current 12.2 11.7 11.7 11.7 PBT margin 13.4% 10.5% 14.4% 15.8% liabilities Long-term 4.3 3.8 3.8 3.8 PATANCI margin 4.7% 5.0% 6.6% 7.3% borrowings Others 7.9 7.9 7.9 7.9 ROE 9.4% 11.6% 15.2% 16.2% ROA 5.4% 5.5% 8.0% 8.8% Current liabilities 286.6 451.5 462.0 520.3 Short-term 38.0 44.1 51.1 58.1 Gearing ratios borrowings Payables 186.0 303.2 306.7 358.0 Net gearing (x) 0.0 0.0 0.0 0.0 Others 62.6 104.3 104.3 104.3

TOTAL 298.8 463.3 473.8 532.0 LIABILITIES Source: Company data, Forecasts by MIDFR

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MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been TRADING BUY assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Total return is expected, by -15% or more, over the next 12 months.

Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been TRADING SELL assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

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