Investment Highlights

• We maintain our BUY call and FV of RM1.76, but cut our FY17F earnings forecasts by 26% (while maintaining FY18-19F earnings forecasts). Our FV is based on 14x FY18F EPS, which is in line with our 1-year forward target PE of 13-15x for mid-cap construction stocks.

• HSL's 9MFY17 net profit missed expectation, coming in at only 55% and 60% of our full-year forecast and full-year consensus estimates respectively, largely due to slower than-expected construction progress billings.

• 9MFY17 net profit declined 29% YoY as: (1) major contracts, i.e. Pan Borneo Highway and sewerage plants both in Kuching and Miri had yet to move beyond initial stages of execution; and (2) lower margins realised on cost escalation.

• These were partially offset by stronger performance from the property segment thanks to increased sales from new launches, i.e. Precinct Premier in La Promenade and Phase 4, Samariang Aman 2, while margins remain stable.

• HSL’s YTD job wins have now added up to RM630mil (which is consistent with our FY17F-19F order book replenishment assumption of RM600mil annually), while its outstanding order book stands at RM2.7bil.

• We continue to like HSL for the following reasons: 1) Its sizeable outstanding order book of RM2.7bil that will keep it busy over the next 3-4 years; 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; and (3) its core strength in marine works and land reclamation.

Source: AmInvest Research - 23 Nov 2017