Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM1.25 based on 10x 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.

• HSL has been awarded by the Upper Rajang Development Agency (URDA) a RM24.7mil contract for the construction of the Ng Machan bridge and road upgrading, under the Sarawak Corridor of Renewable Energy (SCORE) initiative, with a contract period of 18 months.

• The latest job has not materially changed its YTD job wins of about RM700mil and outstanding construction order book of RM2.5bil. Our forecasts assume job wins of RM1bil in FY19F and RM400mil annually in FY20–21F (as we believe the bumper FY19F is unlikely to recur during our forecast period).

• 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 - 23 Sept 2019