Investment Highlights

• We maintain our forecasts, HOLD call and FV of RM1.25 based on 10x FY19 EPS, in line with our benchmark forward target P/E of 7–10x for small-cap construction stocks.

• HSL has secured a RM101.2mil contract from Petronas for the construction of Maktab Rendah Sains Mara in Bintulu, Sarawak, on an open tender basis. This is the first key contract HSL has secured in FY18, boosting its outstanding order book to RM2.6bil. We are keeping our forecasts that assume job wins of RM250mil annually in FY18-20F.

• During a recent visit to HSL, the company acknowledged that similar to its peers in Peninsular Malaysia, contractors in East Malaysia are not spared the weakened prospects for job wins over the short term as the government cuts back on public projects on grounds of fiscal prudence.

• However, the fact remains that East Malaysia is still falling far behind Peninsular Malaysia in terms of infrastructure development. As such, once the dust settles, the rollout of public infrastructure projects in East Malaysia is likely to resume. HSL holds the view that given the budgetary constraints, the government is more likely to focus on smaller-scale/value-for-money basic infrastructure projects. We believe these could include road upgrading, bridges, schools, drainage, smallish water supply and sewerage schemes.

• We remain cautious on the outlook for the local construction sector. As local contractors compete for a shrinking pool of new jobs in the market, they tend to undercut each other, resulting in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We believe HSL will be able to ride out the current downturn in the local construction sector relatively better than its peers, given its substantial order backlog that should keep it busy over the next 3-4 years, coupled with its ability to compete under an open bidding system.

Source: AmInvest Research - 14 Aug 2018