Hock Seng Lee - Good News But Mitigating Billings Gap Is Pertinent

Date: 16/08/2018

Source  :  MIDF
Stock  :  HSL       Price Target  :  1.50      |      Price Call  :  HOLD
        Last Price  :  1.55      |      Upside/Downside  :  -0.05 (3.23%)


  • Awarded Petronas’s project worth RM101.2m
  • Change earnings assumption due to potential blip
  • FYE18/19 revenue and earnings estimates snipped by 15%- 10%
  • Downgrade to NEUTRAL with an adjusted TP of RM1.50

Award from PETRONAS. HSL has received the Letter of Acceptance from PETRONAS for the construction and completion of Maktab Rendah Sains Mara (MRSM) on Lot 129, Block 37, Kemena Land District, Bintulu, Sarawak amounting to RM101.2m. The project is located on a hilly terrain and involves mechanical, electrical piling, building, infrastructure and earth works for duration of 36-month. The project award from Petronas is much anticipated as HSL’s last project award was in November 2017 for the X-Fab building in Kuching for RM56.5m.

Earnings impact. As a result, HSL’s orderbook flitted to RM3.01bn (+3.5%). Although, the award is positive news, the amount is within our assumption of RM200m orderbook replenishment target for FYE18/FYE19.

Earnings outlook. In so far as HSL’s earnings outlook, due to the slower-than-expected progress in Pan Borneo Highway construction which makes up 37% of its total order book (70% JV of RM1.6bn), we reckon it is timely for us to make adjustments to our earnings assumption as the billings recognition potentially may see blips in upcoming quarters.. We see a slower rate of revenue growth in Q1FY18 of RM131.8m (-17.6%) and operating income may slip to RM17.7m (- 9.2%) on the back of a compressed operating margin. (Figure 1) Changes to estimates. Hence, there is a need to revise our assumptions although the orderbook size increased as potential hiccups in billings recognition are risks that must be mitigated. Thus, we prefer to snip our revenue estimates for; a) FYE18 from RM767m to RM575.3m (- 15%); and b) FYE19 from RM710m to RM639.0m (-10%). Consequently, our earnings forecasts are trimmed by; a) FYE18 from RM63.3m to RM50.6m (-10%); and b) FYE19 from RM65.6m to RM59.0 (-10%) to reflect the assumptions that we revised. Nonetheless, moving forward, we think that the prospect of HSL winning more infrastructure jobs is promising as water-related projects in Sarawak is still on-going.

Recommendation. Altogether, we downgrade our recommendation to NEUTRAL with an adjusted TP of RM1.50 per share based on rolling over FYE19’s EPS to PER of 14.0x reflecting construction sector’s mid-range PER.

Source: MIDF Research - 16 Aug 2018

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