Protasco – better to return excess funds to shareholders

[i4value]

Some times companies look for new ventures because the existing ones are not able to scale up. But new venture use up funds.

Take the case of Protasco.  The company has reported 11 business segments even though the revenue for 2023 was only about 1 RM billion.

You may be forgiven for wondering whether management is just trying many things to see what works. When you look at the chart, you can see that only one segment is driving revenue and earnings.



It suggests that management is trying luck to see what else they can do. The worse part is that several of its historical ventures have lost money.  And there are some which have ended up as legal cases as the company tried to recover what was paid.

I would think that it may be better for the company to return the excess funds to shareholders than try luck. Protasco is a cash cow. But the cash is not well deployed.

For more insights refer to Is Protasco an investment opportunity?

[weijian]

hi i4value,

Thanks for your great writeup. I reproduce part of your article as below (in italics) and have some comments/questions:

Based on my valuation, Protasco is still worth RM 0.60 per share. I would expect the market price to match this. Assuming that this price is reached in 2 years, my expected loss would turn into an expected gain of 0.7 % CAGR.

OK, it is not a great return. But it is still better than a loss.

If I exit now at RM 0.20 per share, based on the 35 shares shown in Table 4, I would crystalize a capital loss of 35 X (1.11 – 0.20) = RM 31.85. After accounting for the dividends, this would be reduced to RM 16.34.

The cash received from the sale would be 35 X 0.20 = RM 7.00. If I invest this RM 7.00 in a new undervalued stock, to achieve the 0.7 % CAGR, I would have first to recover the RM 16.34. This meant that the new investment must be a multi-bagger.

(1) When you value Protasco at 60cents and the market price is at ~60% discount, it means that Protasco needs to rise ~150% from its current market price to hit your valuation. What are the catalysts for it to happen? Another North-South expressway in the Islamic East Coast? Or our Dato founders decide to curb their entrepreneur spirit and start returning more cash? Or another 10years for something wonderful to happen?

(2) If you sell Protasco and buy a new investment, I am not sure why you need to "first to recover the RM 16.34". Your new investment probably just needs to have a mid/high single ROE and not purchased at over 1x BV, to have a reasonable good chance to out-perform holding Protasco, in the absence of any catalyst for the latter in the future.

P.S. my neighbour has an old joke - He bought his HDB flat 30years ago at 50k and is renting it out for 4k/month (or 48k gross per annum). His son told him to sell his HDB and move in with him. But he refuses because he says he is getting 48k/50k = 96% yield on his HDB flat and if he sells, he will only be able to get 3% (promo rate somemore) when he puts the proceeds in FD.

[i4value]

The Malaysian construction sector has been soft for many years partly due to the soft property market. So I would expect a pick up in the property development and construction sectors from the economic cycle. Protasco should benefit from this. However, the best thing to happen is for the company not to expand into new sectors. They have to figure out what to bet on rather than have a machine gun approach. But this may be a tough hope.

When I said I have to first recover RM 16.34, I am not looking from a cut-loss perspective. I am comparing holding onto Protasco vs selling and buying a new investment. From an apple-to-apple perspective, wouldn't I have to recover the RM 16.34 for the alternative investment? Of course if you are looking from a cut-loss perspective, this does not matter. But I am not at a stage of cutting loss yet and I think there is potential for Protasco to go higher

[weijian]

hi i4value,

IMHO, you are over compartmentalizing individual companies in your portfolio, and not reviewing it as a whole. As Bill Ackman said in a recent podcast - you don't have to make money back the way you lost it.

Entrepreneurship can be going all-in on 1 thing and then succeed, OR trying many and then one succeed. Entrepreneurship can also be going all-in on 1 thing and then not succeed, OR trying many and then none succeed. Maybe it is better to bet on other construction/property companies which will also benefit like Protasco is expected to, but without the entrepreneur-esprit de corps?