Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.02 based on 9x FY19 EPS, at a premium to our benchmark forward target P/E of 8x for small-cap construction stocks to reflect HSL’s niche strength in marine works/land reclamation.

• HSL has been awarded by Sarawak Energy Bhd Package C05A (earth works and common facilities) and Package C05C (operator’s residence) of the 2 x 312MW Balingian coal-fired power plant project worth a total of RM54.3mil. The contract period is 18 months starting February 2019.

• The latest job is the first key contract HSL has secured in FY19F, boosting its outstanding construction order book to RM2.45bil. To recap, at present, HSL’s outstanding construction order book comprises largely remaining works for:

1. the RM1.2bil work package for the Pan Borneo Highway (total value for the work package is RM1.7bil, HSL has a 70% share);

2. the RM333mil Miri Wastewater Management System; and

3. the RM563mil Kuching City Central Wastewater Management System (Phase 2) (total contract value is RM750mil, HSL has a 75% share).

• We are keeping our forecasts that assume HSL will secure RM250mil worth of new jobs annually in FY19-20F. We estimate that HSL ended FY18F with job wins of about RM200mil.

• We remain cautious on HSL due to the cutback in public infrastructure spending nationwide, including East Malaysia, as the government adheres to greater fiscal prudence. With the altered political landscape post-14th general election in 2018 (coupled with the Sarawak state election by Sept 2021), we could potentially see greater participation of Peninsular Malaysia boys in the construction market in Sarawak, resulting in increased competition and hence reduced margins. This is mitigated by Sarawak being HSL’s home turf and its niche strength in marine works/land reclamation.

Source: AmInvest Research - 12 Feb 2019