Sunday, February 07, 2010

Why I Like Protasco - The Next Mudajaya?

Mudajaya had a ballistic 6 months run up, and thats largely due to their moving up a level from plain construction into power plants business. Mainly they have expanded overseas successfully. Protasco is a bit like Mudajaya albeit 2-3 years behind. Its construction business is solid with 3 concessions, and they have ventured successfully into education, much like KPJ, where they have put a platform to train those in the same industry. The education segment makes up about 15% of revenue and is a good human resource management feeder system as well.


Protasco is principally engaged in the business of investment holding. The principal activities of the subsidiaries are road construction, rehabilitation and maintenance, property development, educational services, site investigation and soil testing services, investment holding and rental of machinery. Protasco's main subsidiaries are involved in the provision of road construction, rehabilitation and maintenance.

Protasco's main and wholly owned subsidiary HCM Engineering Sdn Bhd is engaged the provision of road construction, rehabilitation and maintenance. HCM has been registered with Construction Development Board and it has also been awarded with the G7 license. HCM is able to tender for projects of unlimited value, the company is also able to involved in activities, such as civil engineering construction, specializing in road pavement construction and general civil engineering works.

Kumpulan Ikram Sdn Bhd (KISB), another main and wholly owned subsidiary of PRTASCO is involved in the provision of training, geotechnical laboratory, structural and material testing activities. In addition, PRTASCO holds a 15 years concession to provide the government with a range of services including geotechnical consultancy, forensic engineering, structural and material testing.


The company's main assets are three 15 year concessions. The first is a federal road maintenance
concession covering 6,200km in the states of Selangor, Pahang, Kelantan, and Terengganu expiring in 2016. The second is a federal road maintenance concession for 420km of roads in Sarawak expiring in 2018. The third concession expiring in 2011 involves providing the engineering services of the privatized Ikram group. Protasco’s outstanding order book derived from the concessions stands at 73% or RM1.6b while the remaining RM567m was derived from projects on hand like road rehabilitation, slope testing, and other similar stand alone projects. The company also provides emergency works to infrastructure damaged by landslides and floods.

The company’s
business model does not require large amounts of capital. The biggest capital expenditure is spent on road construction equipment which even when fully depreciated over 8 years, still retains good secondary market value. Although their current contract with JKR Selangor to maintain 3,521 kilometers of state roads was secured before March 8, 2008, the new Selangor government did not exercise its right to rescind Protasco’s contract.





For the 2Q ended Sep 09, they made a net profit of RM15.6m, or a cumulative 9 month net profit of RM45.6m, making them on track to post a net profit of at least RM60m for 2009... or a net EPS of at least 13.5 sen. The company has been able to win both long term concessions and subcontracted works because the company emphasizes the quality of its work. They use high quality materials and more crucially maintains a specialist engineering division. The division undertakes intensive in house research into the soil conditions of the sites where work is being done, in order to formulate the optimum mixture of materials to suit a site’s unique properties. The result is a road pavement that is cost efficient and longer lasting when compared against their competitors.




Protasco’s business does not require heavy capital commitments. The company typically commits 5% of new project values in reserves. The low capital requirements and selection of low credit risk customers have led to a healthy balance sheet. As of June 2009, Shareholder’s Equity stood at RM387.18m against total Liabilities of RM248.87m. Net debt to Equity was -21.4%.

Just like Mudajaya, the company is expanding their reach. The company currently has maintenance projects in Libya and is bidding for a toll project in Syria. They prefer seeking more projects from the two countries rather than regional ones because the governments of those two countries are more reliable paymasters. Other future infrastructure work relates to municipal waste water treatment in China where Protasco would team up with a water technology provider and operate treatment plants. The company already operates a stone quarry in China.

The recent surge in volume may be an indication that something big is brewing in the books. It has fallen back from a high of RM1.16 and looks a sound bet going forward. Even ascribing a 10x current PER (which is low), the stock should be fairly valued at RM1.35. I expect some good corporate developments soon from this under leveraged, and well manged company. The present market weakness has sent the shares back to RM1.00 and should be a good level to pick up.

The other thing I like is that they have paid out about 60% of profits every year, amounting to 7-8 sen. It show to me that the main shareholders are willing to live off the dividends while growing the company. If you look at their paid up which 289m shares, some 63% are in long term shareholders. A very good sign. Both the founders were from JKR and they have made strong inroads with their expertise, now to the next level.

Shareholders (percentage ownership)

Updated: January 12, 2010


Dato Ket Pen CHONG

13.39%


CIMSEC Nominees (Tempatan) Sdn. Bhd. (BC Trustee Advisory for Hasnur Rabiain bin Ismail (PB))

13.12%


Onn Neo YAP

10.39%


Dream Cruiser Sdn Bhd

9.86%


Lembaga Tabung Haji (TH)

8.99%


Max-Three Sdn Bhd

7.74%




The company was started by two JKR stalwarts. Dato’ Hasnur Rabiain Bin Ismail is the Executive Chairman of Protasco Berhad. He was appointed as a board member on
15 May 2001.He obtained his BSc (Hons) degree in 1980 and his MPhil (Civil Engineering) in 1990 from United Kingdom’s Middlesex Polytechnic and the University of Birmingham respectively. The co-founder of Protasco Group has been a member of the Malaysian Institute of Engineers for almost 17 years. Since 1994, he has been a Professional Engineer registered with the Board of Engineers, Malaysia. Starting his career as Road Design Engineer at Jabatan Kerja
Raya (JKR) Ipoh in 1980. In 1988 he assumed the position of Senior Engineer, Pavement Unit of the then JKR’s Institut Kerja Raya (IKRAM). In 1991, he joined forces with Dato’ Chong Ket Pen, laying the foundation for the formation of Protasco Group.

In March 2009, Dato’ Ir Hasnur was appointed as a member of the World Road Association (PIARC)’s Commission on Technological Exchanges and Development (TED Commission) for the period 2009 – 2012.

Dato’ Chong Ket Pen is the Managing Director of Protasco Berhad. A co-founder of Protasco Group, he was appointed as a board member on 15 May 2001. Following a BEng (Hons) degree from the University of Malaya in 1979, he obtained his MPhil (Civil Engineering) degree from the University of Birmingham, United Kingdom in 1990. In 1987 he registered as a Chartered Engineer with the United Kingdom’s Engineering Council. His career began in 1979 with his appointment as Road Design Engineer cum Assistant Project Engineer at JKR Kelantan. Promoted to the position of Project Engineer in 1982, he later became Senior Engineer at the Design and Research Branch of the JKR Headquarters. He was assigned
as Senior Pavement Research Engineer at Institut Kerja Raya Malaysia (IKRAM) in 1988, and subsequently as Senior Engineer, Pavement Evaluation and Research. In 1991, he joined forces with Dato’ Hasnur Rabiain Ismail, and founded Protasco Group.


p/s photos: Keiko Kitagawa

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