Investment Highlights

• We increase our FY20–21F net profit forecasts by 7% and 8% respectively, raise our FV by 19% to RM1.25 (from RM1.05) based on 10x 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. We upgrade our call to HOLD from UNDERWEIGHT.

• We came away from a recent visit to HSL in Kuching feeling slightly more upbeat on its prospects. The key takeaways from the visit are as follows:

1. HSL is highly confident about RM1bil job wins in FY19F and believes the outlook for FY20F is all about “timing”;

2. It has made good progress on its key ongoing mega projects; and

3. It has carved a niche in the crowded property market in Kuching.

• HSL guided for a bumper year in terms of job wins in FY19F. It is setting its sights on RM300mil worth of new jobs for the rest of the year, having already bagged about RM700mil thus far (including internal building works worth about RM100mil). If that materialises, HSL will end FY19F with a total job wins of RM1bil and an outstanding order book of RM2.8bil vs. RM2.5bil currently. We are raising our order book replenishment assumption for FY19F to RM1bil (from RM650mil previously) to bring ourselves in line with the company’s latest guidance.

• However, the company believes that it is premature for it to provide specific guidance for FY20F. While HSL has positioned itself by submitting tenders for government contracts “to the tune of a few billion ringgit”, the chances of them filtering down to job wins depend on the competitiveness of HSL’s bids, and more importantly, the timing of the award of the contracts.

• HSL acknowledged that for federal-funded government jobs in Sarawak, as in the case of Peninsular Malaysia, their rollout has not been spared the delays (we believe, due to budgetary constraints and bureaucracy). For the state-funded projects in Sarawak (predominantly, the much-publicised RM11bil projects including the Coastal Road, Second Trunk Road and 11 mega bridges, to be funded with state reserves), HSL believes that it is entirely the prerogative of the state government when it comes to the timing of the award of the contracts.

• We are keeping our assumption for job wins of RM400mil annually in FY20–21F, as we believe the bumper FY19F is unlikely to recur during our forecast period.

• Meanwhile, HSL has made good progress on its three mega projects. They are either on or ahead of schedule (Exhibit 1).

• Similar to Peninsular Malaysia, the property market in Sarawak has been weighed down by oversupply and the tight lending policy of the banks. However, HSL managed to register RM46mil sales in 1HFY19 vs. RM28mil in 1HFY18, boosting its unbilled sales to RM250mil from RM210mil a year ago. This should help sustain its property earnings (which typically make up 20–40% of group earnings) for the next 2–3 years.

• HSL has carved a niche in the high-end landed segment, i.e. bungalows, semi-detached homes and superlinked houses in gated and guarded communities with club facilities. Following the successes of Precinct Premiere and Precinct Luxe, HSL has recently put onto the market Precinct Grande comprising nine bungalows (@ RM4mil) and 16 semi-detached units (@ RM2mil). It has thus far sold about 40% of them.

• We remain cautious on the outlook for the construction sector. The government has very limited room for fiscal manoeuvre given the still elevated national debt. In Sarawak, while the state could step in to fill the gap with state reserves-fuelled infrastructure projects, we believe this strategy (ahead of the state election which must be held by Sep 2021) may not be cast in stone. For HSL, the uncertain sector outlook is partially mitigated by its competitiveness due to its niche strength in marine works/land reclamation.

Source: AmInvest Research - 12 Sept 2019