Investment Highlights

• We maintain our forecast, BUY call and increase our FV to RM2.00 (vs RM1.76) as we roll forward our valuation base year to FY19 from FY18. Our FV is based on 13x FY19 EPS, which is in line with our 1-year forward target PE of 13-15x for mid-cap construction stocks.

• The company’s FY17 core net profit of RM46.5mil met our forecast, but missed consensus estimates by 12%.

• HSL’s FY17 net profit dipped 18% YoY due to the following: 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 in ongoing projects.

• These were partially offset by a 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 remained stable.

• HSL’s outstanding order book currently stands at RM2.9bil (including RM630mil secured in FY17). Meanwhile, we are keeping our FY18F-20F order book replenishment assumption of RM600mil annually.

• We continue to like HSL for the following reasons: 1) Its sizeable outstanding order book of RM2.9bil 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 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 - 28 Feb 2018