Investment Highlights

• We keep relatively unchanged our forecasts and FV of RM1.13 based on 10x 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. However, we cut our FY20–22F dividend forecasts to 1.4 sen annually (from 2.4 sen) to reflect HSL’s decision not to declare an interim dividend of 1 sen for FY20F “to preserve our cash reserves to sustain ongoing operations”. Maintain HOLD.
• HSL’s 1HFY20 net profit came in at only 31% and 32% of our full-year forecast and the full-year consensus estimates respectively. However, we consider the results within expectations as we expect a stronger 2H with construction activities gradually normalising from the height of the Covid-19 pandemic in Mar/Apr 2020. HSL said that its productivity has now improved to 60% of prepandemic levels, from 30–40% in June 2020.
• Its 1HFY20 net profit plunged 62% YoY as the movement control order (MCO) hurt both construction activities (work suspension coupled with disruption to the material supply chain) and property sales. Construction EBIT margin contracted by 4.7 percentage points to 4.4% as the unit continued to incur certain overheads despite activities coming to a complete halt at the height of the pandemic.
• At present, we estimate that its outstanding construction order book stands at RM2.1bil. 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. However, its valuations are rich at 10–17x forward earnings on muted growth prospects.

Source: AmInvest Research - 7 Aug 2020