Investment Highlights

• We cut our FY21–23F net profit forecasts by 17%, 4% and 4% respectively and reduce our fair value (FV) by 4% to RM0.92 (from RM0.96) based on 9x revised FY22F EPS, in line with our benchmark forward target PE of 9x for small-cap construction stocks. There is no FV adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 4). Maintain HOLD.

• HSL’s 1QFY20 net profit came in below expectations at only 14% and 17% of our full-year forecast and the full-year consensus estimates respectively. We believe the variance against our forecast came largely from weaker-than-expected construction earnings due to: (1) the still sub-optimal productivity on various operational restrictions amidst the pandemic; and (2) the elevated steel bar price.

• Nonetheless, its 1QFY21 net profit rose 20% YoY as it began to adapt to operating under the new norms. This was reflected in its 1QFY21 construction billings surging 40% while construction EBIT margin stabilising at 5.8% despite the higher steel bar price.

• Our earnings downgrade is to reflect: (1) slightly weaker FY21F construction billings on the recent resurgence in Covid-19 infections nationwide, including in Sarawak; and (2) higher cost pressure, particularly, from steel.

• Meanwhile, so far this year, HSL has secured one key job, i.e. a RM130.7mil contract for the construction of the Leadership Training Institute of Sarawak Civil Service (Phase 1) in Kuching. Its outstanding order book currently stands at about RM1.8bil. There is no change to our forecasts that assume job wins of RM400mil annually in FY21–23F.

• We remain cautious on the outlook of the local construction sector. The recent news on the MRT3 potentially commencing work in the second half of the year aside, the fact remains that the government will have very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic.

• In Sarawak, on a brighter note, there is a fair chance that 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).

• 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 as a small-cap construction outfit are fair at 9–10x forward earnings on muted growth prospects.

Source: AmInvest Research - 21 May 2021