Investment Highlights

• We raise our FY20–21F forecasts by 2% each, increase our FV by 3% to RM1.02 (from RM0.99) based on 9x revised FY20F 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. However, we maintain our UNDERWEIGHT call.

• HSL has been awarded by Sarawak’s Public Works Department the Jalan Sg Bidut/Kpg Tutus/Kpg Sebedil/Kpg Bungan Kecil road project (Package A) in Sibu, Sarawak, worth RM104.5mil, with a contract period of two years commencing Sep 2019.

• The latest job has boosted its YTD job wins to RM480.5mil and its outstanding construction order book to RM2.6bil. 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).

• The earnings upgrade is largely to reflect our new assumption for job wins of RM500mil in FY19F (from RM400mil previously). We keep our construction order book replenishment of RM400mil annually in FY20–21F.

• We maintain our view that a sustainable funding model for public infrastructure development in Sarawak is by tapping into federal funds vs. draining on the state reserves of Sarawak. In any case, we believe the market could have adequately priced in the potential of a state reserves-fuelled infrastructure boom in Sarawak (ahead of the Sarawak state election by Sep 2021) with HSL share price having held up at levels close to those prior to the 14th general election (GE14) in May 2018.

• Also, with the altered political landscape post-GE14, we could potentially see greater participation of Peninsular Malaysia players 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. HSL’s valuations are unattractive at 12–13x forward earnings on a muted sector outlook.

Source: AmInvest Research - 20 Aug 2019