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’s 9MFY19 net profit met expectations at 75% and 71% of our full-year forecast and the full-year consensus estimates respectively.

• Its 9MFY19 net profit grew 7% YoY driven by stronger property profits and higher interest income while construction earnings were relatively flat. Despite a 6% growth in its top line, construction EBIT only rose 1% as EBIT margin contracted by 0.4 percentage point to 8.4% due to increased competition and the general rise in construction cost.

• HSL has thus far in FY19F secured new jobs worth about RM700mil while its outstanding construction order book stands at RM2.5bil. Our forecasts assume job wins of RM1bil in FY19F (a bumper year that is unlikely to recur over the short term), normalising to RM400mil annually in FY20–21F.

• 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 the RM11bil state reserves-fuelled infrastructure projects comprising the Coastal Road, Second Trunk Road and 11 mega bridges (ahead of the state election which must be held by Sep 2021), the rollout of work packages from these highly publicised projects seems to have hit a snag after the initial hype.

• 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 - 19 Nov 2019