Investment Highlights

• We maintain our HOLD call, but reduce our FY20–21F net profit forecasts by 6% each and similarly FV by 6% to RM1.18 (from RM1.25). The basis for our FV is 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. The earnings downgrade is to reflect job wins of only RM700mil in FY19 vs. our assumption of RM1bil.

• HSL’s FY19 net profit came in below expectations, missing our forecast and consensus estimates by 8% and 10% respectively. We believe the variance against our forecast came largely from weaker-than-expected construction margins realised due to cost pressure.

• Its FY19 net profit grew 3% YoY driven by stronger construction billings and higher interest income, partially offset by lower property profits. For the construction division, a 12% expansion in its top line only translated to a 6% growth in EBIT as EBIT margin contracted by 0.4 percentage point to 7.4% due to increased competition and the general rise in construction cost.

• Our forecasts assume job wins to normalise to RM400mil annually in FY20–22F, after a bumper year in FY19 with job wins of about RM700mil. At present, its outstanding construction order book stands at RM2.2bil.

• 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. Not helping either, is the current political impasse that could stall the award of public projects. 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 - 27 Feb 2020