Investment Highlights

• We tweak our FY19-20F net profit forecasts down by 2% each, trim our FV to RM0.99 (from RM1.02) and maintain our UNDERWEIGHT call. Our new FV is based on 9x revised 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’s FY18 net profit disappointed, missing our forecast and consensus estimates by 7% and 8% respectively. We believe the variance against our forecast came largely from slower construction work progress at major projects coupled with lower margins realised.

• FY18 net profit grew 13% YoY thanks largely to stronger construction profits as key projects started to contribute more significantly, together with some improvement in property profits.

• At present, HSL’s outstanding construction order book stands at RM2.2bil, comprising 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). In terms of job wins, our forecasts assume RM250mil annually in FY19–21F. So far in FY19F, 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 coalfired power plant project worth a total of RM54.3mil.

• 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 following the 14th general election in 2018 (coupled with the Sarawak state election by Sept 2021), we could potentially see a greater participation of Peninsular boys in the construction market in Sarawak (especially for projects financed by federal funds), resulting in increased competition and hence reduced margins. However, this is mitigated by Sarawak being HSL’s home turf and its niche strength in marine works/land reclamation.

Source: AmInvest Research - 27 Feb 2019