PROTASCO BHD is confident of securing 30% to 40% of the RM2 billion worth of tenders it has bid for this year in efforts to grow its core construction and property development businesses after it failed to secure deals to diversify into the resources sector in Indonesia last year.

The group has the capacity to take up about RM1 billion worth of construction jobs a year, says its group managing director and largest shareholder Datuk Seri Chong Ket Pen. Protasco’s construction order book stands at about RM640 million currently, which can last the group for two years, says Chong.

“We are actively bidding for jobs to replenish the orders so that earnings from the construction business can grow further. We are quite confident of securing a good success rate of between 30% and 40% of the tenders we bid for,” says Chong in an exclusive interview with The Edge.

The success rate target is quite bullish for Protasco (fundamental: 1.15; valuation: 1.20), a mid-size construction company with a market capitalisation of RM618.5 million. If Protasco manages to secure 30% of the tenders, its order book will almost double to RM1.24 billion.

“We can do more. If we hit big (in securing contracts), we can always double the workforce and machinery to take on more jobs,” says Chong.

Protasco wants to forge ahead in the construction and property development sector, says Chong, putting an end to any question of whether the group is going to pursue diversification into the oil and gas sector.

In January last year, the company announced the acquisition of a 63% stake in an Indonesian oil and gas company, PT Anglo Slavic Indonesia (ASI), for RM68.4 million from PT Anglo Slavic Utama (ASU). The deal was later aborted after the sale and purchase agreement lapsed.

A boardroom tussle between Chong and Datuk Tey Por Yee, a substantial shareholder of Protasco, followed. Protasco alleged that Tey and his partner Ooi Kock Aun, who were both board members of the group from late-2012 to 2014, had breached their fiduciary and statutory duties.

Chong alleged that Tey and Ooi held indirect interests in ASU. Protasco sued ASU to return the US$22 million it had paid for the purchase of the stake in ASI. Tey and Ooi later counter-sued Chong and Protasco, alleging that RM10 million had been siphoned off to Chong’s private vehicle.

However, on June 3, Tey and Ooi’s counterclaim was struck out by the Kuala Lumpur High Court. The suit by Protasco is set for trial on Oct 1 and 2. Tey and Ooi have filed for a stay application pending arbitration.

When asked about the lawsuits, Chong declines to dwell on them, saying that he  is leaving them to the courts to decide and just wants to focus on Protasco’s current businesses. He adds the squabble with Tey does not affect Protasco’s ability to secure jobs and deliver good earnings to shareholders.

With its oil and gas aspirations snuffed out, Protasco can focus on growing its construction and property development business. However, it has only been getting government contracts and concessions so far.  

The bulk of the group’s orders is made up of the RM578.5 million contract to build 1,680 apartments for civil servants in Putrajaya. Protasco bid for jobs for Petronas’ Refinery and Petrochemical Integrated Development project in Johor last year but did not manage to clinch any, reveals Chong.

Protasco is arguably an expert in road construction and maintenance through its subsidiaries Roadcare (M) Sdn Bhd and HCM Engineering Sdn Bhd. Roadcare holds a 15-year concession to maintain federal roads in the states of Selangor, Pahang, Kelantan and Terengganu worth RM358 million.

Meanwhile, HCM holds a 15-year concession to maintain Federal roads in Sibu, Bintulu and Mukah in Sarawak worth RM232 million. Roadcare and HCM’s concessions will expire in February 2016 and February 2018 respectively.

Chong says Protasco is in negotiations to renew the Roadcare concession in Selangor. MIDF Research analyst Hafiz Hassan does not expect any problem there as the the same concession in the southern region has been renewed.

“That will guarantee the bulk of the group’s earnings visibility for the next 10 years,” says Hafiz in a research report dated May 28, 2015. The road maintenance business contributed about half of Protasco’s revenue of RM1.15 billion last year, and about 70% of its profit after tax of RM67 million.

Besides the federal road maintenance concessions, Protasco also has long-term contracts to maintain state roads in Selangor, Terengganu and Perak. The Selangor contract will expire in September this year, followed by the Terengganu contract in July next year and the Perak job in December 2019. The contracts are valued at about RM240 million. Protasco is negotiating with the Selangor government to renew the contract, confirms Chong.

However, Chong feels that Protasco should grow its construction business to give its shareholders double-digit earnings growth. “Nevertheless, I am comfortable with the outstanding order book that we have right now, although we can always take in more. We can assure our shareholders an earnings growth of about 15% this year,” he says.

In early April, the group secured from Malaysian Resources Corp Bhd a federal road construction contract worth RM77 million in Sarawak and a RM58 million contract to connect Jalan Klang Lama with the New Pantai Expressway.

In the first quarter ended March 31, Protasco’s net profit grew 24% to RM13.1 million, compared with RM10.6 million in the same quarter last year. Revenue increased 48% to RM219.1 million from RM147.8 million.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on June 15 - 21, 2015.

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