Investment Highlights

• We reduce our FY20-22F net profit forecasts by 46%, 8% and 8% respectively, but only cut our FV by 5% to RM1.12 (from RM1.18) as we roll forward our base year to FY21F (from FY20F). The basis for our FV is 10x revised FY21F 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. Maintain HOLD.

• HSL’s 1QFY20 net profit came in significantly below expectations, at only 11% and 13% of our full-year forecast and the full-year consensus estimates respectively. The main culprit was the 2-week impact from the Movement Control Order (MCO) which turned out to be much more damaging than expectations (and shall continue to wreak havoc at least in 2Q, as per HSL’s indication that “at the start of the Recovery MCO, we are working at 30-40% productivity”). We have reflected this in our earnings downgrade.

• Its 1QFY20 net profit plunged 46% YoY as the MCO hurt both construction activities (work suspension coupled with disruption to material supply chain) and property sales. Construction EBIT margin contracted by 3.2% points to 5.8% as the unit continued to incur certain overheads despite construction activities coming to a complete halt.

• At present, its outstanding construction order book stands at RM2.2bil. 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. So far in FY20F, HSL has yet to secure any major new job.

• 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 and reduced petroleum revenues. In Sarawak, while the state could step in to fill the gap with the RM11bil state reservesfuelled 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 Jun 2020