Investment Highlights

• We cut our FY17-19F earnings forecast by 9%, 19% and 30% respectively, reduce our FV by 18% to RM1.76 (from RM2.15) but maintain our BUY call. Our FV is based on 14x revised FY18F EPS, which is in line with our 1-year forward target PE of 13-15x for midcap construction stocks.

• HSL's 1HFY17 net profit missed expectations, coming in at only 33% and 32% of our and consensus full-year forecasts respectively, largely due to slower-thanexpected construction progress billings.

• HSL's 1HFY17 net profit plunged 27% YoY and 15% QoQ to RM9.5mil in 2QFY17 as compared to RM12.1mil for 2QFY16 and RM11.3mil in 1QFY17 due to:
  1. Progress claim timing – The decline of net profit was mainly due to the timing of progress claims for construction works as major contract works such as Pan Borneo Highway and sewerage plant both in Kuching and Miri are in the initial stages of execution and lower profit margin was recognised during the quarter as operating cost has been escalating.
  2. Partial mitigation by a pick-up in the property segment – Revenue for the property segment grew to RM16.8mil (2Q16: RM10.8mil) while net profit rose to RM5.86mil (2Q16:RM3.2mil) on the back of recognition of sales from new launches with stable profit margins.
      
• On a brighter note, HSL has added RM558mil new jobs in FY17, bringing its construction order book to a historical high of RM3bil with RM2.6bil unbilled. FY17 top line will be underpinned by a number of smaller projects which are near completion, particularly, infrastructure and building works in SCORE region (i.e. Tanjung Manis, Mukah & Samalaju), while mega projects like Pan Borneo Highway and Sewerage plant should move into more active phases. Additionally, the property segment should remain robust in FY17 with a variety of commercial, industrial and residential products to be put on the market.
   
• We continue to like HSL for the following reasons: 1) Its sizeable outstanding order book of RM2.6bil that will keep it busy over the next 3-4 years; and 2) Its strong prospects for new job wins from massive infrastructure developments such as roads (anchored by the RM16bil Pan Borneo Sarawak Highway and the RM12.8bil Pan Borneo Sabah Highway), ports, hydro power plants and water/wastewater treatment facilities.

Source: AmInvest Research - 23 Aug 2017